(Disclosure: Anything said in this article is NOT investment advice)
There are number of reasons why I like Twitter, the platform. Its a treasure trove of useful content and nice way to get a pulse of what’s happening in the world. But most importantly, it feels different to use Twitter as compared to other social media. There’s tons of people with knowledge and experiences worthy of sharing, no matter what industry or group you belong to or identify yourself with. I have been spending more time (and quality time) on it lately and $TWTR’s investment case looks quite compelling to me as well.
Twitter made a lot of noise when it launched as it went head-to-head with Facebook. The latter, which was able to grow its user-base faster using using both organic and inorganic means, established a sizable lead over Twitter after the Instagram acquisition. Twitter wasn’t left with anything to latch onto. It tried different sorts of strategies to differentiate the platform with Vine (does anyone remember that 6-second-video app?!), Periscope (live stream video) and some other commercial deals with mega brands like NFL in the U.S. But as we all know, when your competitor gets a head start on a social media platform and the network effects start kicking in, it turns into an uphill battle from there. User growth slowed down and Ad-revenue growth followed. Total revenues for the company have been growing at a CAGR of 12-15% while other content platforms like Snapchat (SNAP), Pinterest (PINS) and now TikTok entered the ‘exponential-growth’ territory.
Enter Activists
Elliot Management, one of the largest activist funds in the world, launched a campaign back in February to remove Jack Dorsey, the current stand-in CEO after he had announced he would move to Africa and lead both Twitter and Square from there. Now some industry insiders have blamed the current management of squandering a golden opportunity to transform the platform into something much bigger and better. And Elliot, doing what it does best, tried to shake-up the cohort to pick up the slack. While Jack retained his role as CEO, Elliot and Silver Lake (another PE firm) got seats on the board and got a $2bn share repurchase program approved.
Since then, Twitter has made it clear how it plans to improve its KPI’s. It has promised to get the user-growth rate back above 20% in 2020 and invest a lot more in product and R&D to increase user engagement. One of the ways to do that was introducing Fleets, giving users more ways to share content. It has also aquired a couple of small start-ups in the U.S to integrate new collaboration features in the product.
More upsides than downsides
Making a convincing investment case for $TWTR is not easy. While the management has clearly changed tact and defined its plan to improve user and revenue growth, whether they would be able to achieve it while fending off competition is hard to predict. But….
The current political environment around them could act as a massive tailwind and set the ball rolling. Big tech has been under scrutiny for quite some time now with user data privacy issues and last week the UK and EU governments finally laid out their regulation frameworks to get Facebook, Google and other platforms under the scanner. Now Twitter’s network graph has been built on ‘what-you-like’ or ‘what-your-interests-are’ unlike Facebook, Linkedin or Google’s platforms that depend on personal user-data and ‘who-you-are’. This makes Twitter’s network graph defensible against data privacy issues (it doesn’t need to sell personal data to advertisers).
Additionally, the same network graph is resiliant to other upstart networks’ new products for the very same reason, most social apps use personal data (like a user’s phone address book) to build their network. Over time, the core network has become better although it did trade-off the high growth trajectory in its early days.
From a valuation standpoint, it trades at 10-11x EV/Sales (same as Facebook’s) and has a $44bn market-cap. Given the current market environment, it doesn’t surprise me at all how lofty $SNAP’s and $PINS’s valuations are at the moment.
Yes, you could argue higher user growth rates and different user demographics here. Even if you factor those in, 30x sales seems hardly justifiable. Infact TWTR’s ARPU (Average revenue per user) is substantially better than both SNAP and PINS. If things start moving in the right direction for TWTR, a re-rating in its valuation could turn it into a 2-3x stock. After all, the narrative takes years to change and then changes all of a sudden.
I don’t know what’s going to happen with the stock price next. All I can say is that the odds are in its favor with an experienced team and a beautiful product on hand. Elliot and Silver Lake on the board is an added advantage. With so much going on in the world at the moment, users that get on to Twitter to check what’s happening and voice their views (the consumer product) can be locked in to increase engagement and attract those ad-dollars back in (the revenue product). The cash flows would soon follow, with the $2bn stock buyback.
How I would execute this idea would be allocating a small (2-3%) position to $TWTR and add to it if the hypothesis is confirmed in the subsequent quarterly earnings.
So, is it good time to be long $TWTR?
See you next week,
The Atomic Investor
The Atomic Investor 