Why Twitter Inc (NYSE:TWTR) Is Not For Non-Believers
Twitter Inc (NYSE:TWTR) reported 1Q2016 revenues at the lower end of internal guidance as major brand advertisers didn’t increase spending as Twitter had hoped for during the quarter. Nevertheless, the company is favored to win with the shift to mobile given its large mobile subscriber base. About 80% of Twitter’s monthly active users (MAUs) access the site on mobile devices.
This Twitter analysis article looks at the company’s risks and opportunities to enable you make an informed investment decision. But first, here is a brief recap of the company’s earnings for the latest quarter.
Revenue of $595 million rose 36% YoY (+39% YoY excluding currency headwind). The topline number not only grew slower compared to a year ago, but also missed the consensus estimate of $607.5 million. Coming to the bottom-line, Twitter posted non-GAAP EPS of $0.15, topping the consensus estimate of $0.10.
Twitter Inc (NYSE:TWTR) guided 2Q2016 revenue in the range of $590 to $610 million. But the topline forecast is below the consensus estimate of $677 million.
The chart below shows Twitter’s revenue and cost of revenue for the last five quarters:
What’s exciting about Twitter?
- Positive response to video ad format
Twitter Inc (NYSE:TWTR) noted a spike in spending on video ads during 1Q, a sign that its video ad format has a potential if properly done. The company introduced autoplay videos as a strategy to maximize its video ad revenues.
As Twitter drives video consumption on its platform, it also widens the opportunity for video ad revenues. Strong video engagement means that Twitter is well-placed to benefit from the secular shift of advertising budget to online. Global ad spending is quoted at $500 billion annually and only about 15% of that spending has come online. Moreover, only a tiny fraction of television ad spending has come online. Therefore, there is a huge revenue opportunity for Twitter to tap by building a vibrant video platform.
However, for Twitter to make maximum gains from digital video advertising market, the company must work hard to increase its subscriber numbers and offer advertisers the tools they need to increase ROI.
Without improving engagement on the platform and giving advertisers reason to stick with the platform, Twitter risk losing video ad dollars to rivals Facebook Inc (NASDAQ:FB) and Alphabet Inc (NASDAQ:GOOG)’s Google. These competitors not only boast larger audiences but are also aggressively pushing toward video ads business with more intuitive advertiser tools.
Twitter finished 1Q2016 with 310 million MAUs and over 100 million daily active users (DAUs). According to Twitter’s metrics, the average user visits the site 20 times a day and that makes it one of the most visited social media. One of the reasons for the vibrant engagement on Twitter is the site’s latest slate of features that encourage users to spend more on the platform. Twitter’s broadcast nature is also adding to the engagement story. For example, people not only flock to Twitter to share what’s on their mind, but also to consume information mostly from news organizations that have popularized Twitter as a platform for breaking news.
Twitter added 5 million MAUs in 1Q2016 to take its total MAU count to 310 million, above the consensus estimate of 308 million.
3.Twitter for mobile
The secular shift to mobile favors Twitter Inc (NYSE:TWTR) because the platform is mobile-oriented from the beginning. That can be seen in its 140-character limit for posts. The ongoing expansion of LTE networks and deepening penetration of smartphones should improve mobile engagement on Twitter.
In the latest quarter, Twitter reported that 80% of its MAUs accessed the site on mobile devices. Additionally, mobile accounted for more than 80% of the company’s advertising revenue in 1Q2016.
People on mobile tend to spend more time on Twitter on the average. That means that deeper mobile penetration will increase engagement on the platform and expand revenue potential.
It is estimate that Twitter could attract 2.3% of the $102.5 billion mobile ad spending this year.
Under Jack Dorsey, Twitter has turned to rolling out innovative products targeting advertisers are subscribers in a more frequent basis. That in part explains Twitter’s better than expected subscriber growth in the latest quarter and the sharp spike in the number of active SBM advertisers on the platform.
Twitter Inc (NYSE:TWTR) has turned its site into a platform where brands can not only target potential customers with advertisements, but a place where they can also sell directly to the audience. The company has introduced a Buy button feature that simplifying shopping and checkout on its site. The so-called social commerce has the potential of unlocking significant revenue potential for Twitter in the coming years. Moreover, social commerce should enable Twitter to diversify its revenue streams given that the company currently heavily relies on advertising dollars.
What’s worrying about Twitter?
- Stiff competition
Twitter Inc (NYSE:TWTR) faces intense competition from almost all directions. The company is competing against Facebook and a host of other social networks for subscribers. The company is also competing with the same rivals for advertisers, but its currently small subscriber base puts it at a great disadvantage when it comes to winning over advertisers.
To accelerate its growth, Twitter acquires strategic assets from time to time. While its recent acquisitions have mostly been integrated successfully, sometimes the integration process becomes difficult meaning the process can be long and costly. As Twitter continues with acquisitions, it is not immune to these risks.
Additionally, acquisitions tend to pile more pressure on the management to justify the deal. Such pressures can distract the management from pursuing long-term growth.
Advertising is currently Twitter Inc (NYSE:TWTR)’s bread and butter. But if intensifying competition for ad spending, the company’s growth might stall if it does not diversify its revenue streams. Although in the recent times it can be seen expanding into social commerce whereby it is allowing subscribers to shop directly on the platform, social-commerce is only a tiny portion of the business.
As Twitter grows in terms of subscribers, it will also attract increased regulatory scrutiny. But heightened regulatory oversight often comes with added risks to the company because it is never far from fines and the operating environment also becomes complex.
If the latest quarter report is anything to go by, Twitter Inc (NYSE:TWTR) requires patience. Otherwise it might seem like nothing is happening.
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