Can Twitter Dig Itself Out of the Hole?
- By Shudeep Chandrasekhar
Twitter (TWTR) has lost a lot of shine in social media circles, especially from an investor's point of view. There was a time when Twitter and Facebook (FB) used to be in the same sentence when investors discussed social media. Then Facebook started moving at breakneck speed, increasing its product portfolio, revenues, user base - and most importantly, its bottom line profitability.
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The intrinsic value of TWTR
Twitter's revenue grew as well, from $28 million in 2010 to $2.2 billion in 2015, but its losses widened, too, from $67 million to $521 million during the same period. Facebook on the other hand reported $17.92 billion in revenues in 2015 with nearly $3.7 billion in profits.
It's obvious that there is now a gulf separating Twitter and Facebook, and we cannot put them in the same bracket any longer. Let's take a closer look at the things that have held Twitter back from mirroring the success of Facebook, and what that means for investors.
User base growth
This is one key metric that any social media company needs to be scrutinised on. If you are a social media network and your user base is not growing, then at some point you will start losing them. Other apps will start to steal away your users and it will be only a matter of time before the no-growth turns into negative growth.
The reason is simple: It is not an industry without competition, so once you start losing customers by trickles and drips, it's only a matter of time before that turns into a cascade and then eventually a gushing waterfall.
Though this process might take a really long time, it has to happen unless you are a monopoly player in the industry. Twitter does have a growing user base, but the pace of that growth leaves a lot to be desired.
Between 2012 and 2016, Twitter more than doubled its monthly active user base, from 138 million in Q1 2012 to 310 million in Q1 2016. During the same period, Facebook went from 901 million monthly active users to 1.6 billion in Q1 2016. To put it another way, Facebook added 753 million monthly active users to its base of 901 million, while Twitter added 172 million to its base of 138 million users. So Twitter is trotting, while Facebook is galloping towards exhausting its penetration of the available internet-connected global population.
To exacerbate the problem, Twitter is still losing money. Though total sales have steadily gone up over the years, the operational losses do limit the ability of the company to reinvest in itself to keep the growth story moving, and this limits the options at Twitter's disposal.
ARPU: average revenue per user
The other big problem Twitter faces is the average revenue per user. Twitter's ARPU is nearly half of what Facebook is able to earn, and Twitter needs to close this gap as early as possible.
Considering the rate at which user base is growing between these two platforms, any big advertiser will naturally gravitate towards Facebook because of sheer scale. Unless Twitter offers a better reason to choose them over their rival, advertisers will entrench themselves more and more into Facebook's platform, which now includes the 400 million users on Instagram as well.
The investment angle
Here's my take on Twitter: The company is operating in a very difficult environment, it is still making losses, user base is growing but still far away from where it should have been, ARPU is low compared to the competition and all these are complicated issues that won't vanish in a single day.
It is very difficult to recommend Twitter as a buy unless they are able to show visible traction. And they better start with user base growth. Until such time, Twitter will be on my watchlist. I like the company and its platform as a user, but I cannot trust them with my money -- at least not yet.
Disclosure: I have no position in any of the stocks mentioned and no intention to initiate any position in the next 72 hours.
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This article first appeared on GuruFocus.
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The intrinsic value of TWTR
