These days you mention Twitter Inc (NYSE:N:TWTR) and what quickly comes to the mind of investors is a company whose stock has been bad news in recent times. Twitter’s stock is down more than 40% over the last nearly six months, with its market cap fading by nearly $15 billion over the same period.
It is not that Twitter isn’t making money or that investors are pulling their money out of it. The company’s revenue has been expanding consistently over the last several quarters and registered a stunning 58% year-over-year uptick in revenues in the last quarter (3Q2015) to $569 million. However, the problem is that Twitter’s growth isn’t enough to quench the thirst of its investors.
While the 58% jump in quarterly revenues is commendable, investors want to see Twitter growing everywhere from the topline all the way to the bottom-line. That is where Twitter has fallen short of expectations. Its monthly active users (MAUs) increased at a miserable 1.3% quarter-over-quarter to 320 million. Although the user metric rose 11% year-over-year, that was still underwhelming.
The chart below shows Twitter’s MAUs in the past quarters:
Without strong user growth, investors know Twitter isn’t going anywhere, especially considering that it is languishing with slightly over 300 million subscribers when its fiercest rival, Facebook Inc (NASDAQ:O:FB), is boasting 1.5 billion active subscribers.
Given its limited scale, Twitter cannot effectively compete with Facebook in the brand advertising space, which is lucrative, but where marketers are interested in a large audience. Moreover, Twitter’s direct response advertising strategy requires deeper user engagement that the company cannot currently guarantee its advertisers given that many people still consider the platform complex to navigate.
Does Dorsey hold the key to success?
Many like to think of Twitter’s CEO, Jack Dorsey, as an incarnation of Apple Inc. (NASDAQ:O:AAPL)’s co-founder and former CEO, Steve Jobs. You can actually draw multiple similarities between Dorsey and Jobs: Dorsey is a comeback CEO just as Jobs was; both were ousted from the companies they helped to launch. But can Dorsey be to Twitter what Jobs was to Apple?
For the few months he served as interim CEO before his confirmation, Dorsey proved himself to understand what ails Twitter – weak product portfolio. The problem has also made Twitter complex to use, thus putting off millions of potential subscribers.
Knowledge of the problem is half the solution. Dorsey recently announced staff layoff where product engineers are expected to be the largest casualties. The retrenchment is part of Dorsey’s efforts towards building a more robust and sharp-pointed product team.
Although there are pressures to balance short-term interests with a long-term vision, rebooting Twitter’s product portfolio will help put many problems to rest. Investor agitation will cool as subscriber numbers soar and revenue jumps by double-digits. The idea is that simplifying Twitter will make money, adding more people interested in the service, thus boosting user count.
What’s happening on the products front?
Moments is now showing
Initially tested as Project Lightning, Moments is a curated content service that enables Twitter Inc (NYSE:TWTR) subscribers to discover and follow trending topics. Moments has seen a major product update on Twitter both in terms of how it is rendered and its potential impact on the platform.
A first on Twitter: Unlike most other newsfeed features on Twitter, Moments are curated by human editors backed by artificial intelligence to serve more relevant content. Moments features update around events such as Sports, Entertainment, Fun, News and more. The feature is also a great way for people to deal with overwhelming content stream on Twitter.
With Moments, Twitter can be seen trying to deeply engage people who already come to the platform primarily to consume news. Additionally, Moments is also a feature to enhance the value of Twitter and get more people interested in the service, especially those that have not already subscribed to it. As such, Moments is a multifaceted feature that Twitter hopes will attract more subscribers, draw back defectors, keep existing ones more engaged and encourage advertisers to spend their money on the platform.
Moments content comes in the form of text, images and videos. Multiple media companies contribute their stories to Moments. With the growing popularity of Moments among social media news consumers, Twitter has also found a way to get advertisers involved directly with Moments through Promoted Moments. Through Promoted Moments, Twitter is able to generate incremental ad revenue.
Periscope – fostering video engagement
Periscope adds to Twitter’s real-time appeal. The live-video broadcast service continues to register an influx of hundreds of thousands of users who are either live-streaming raw video or consuming the streaming content.
Twitter can harness the excitement around Periscope to bolster engagement on its platform and also squeeze more advertising dollars. Integrating Periscope into Moments could be one great way to unlock huge monetization potential on the platform.
Video is emerging quickly as a popular touch-point in the social media sphere.
Buy Now – fostering social commerce
Twitter Inc (NYSE:TWTR)’s Buy Now, or Buy-button feature as it is fondly known, has been made widely available in the U.S. for merchants to sell directly through tweets. The feature also allows subscribers to buy items on the Twitter platform with only a few simple steps.
The wide rollout of the Buy Now feature puts the commerce tool at the disposal of millions of merchants who can tap into it to boost their online sales. For Twitter, the Buy Now tool presents another product update targeted at fostering deeper subscriber engagement on the platform. Moreover, the company stands to take a cut from transactions done on its platform, thus allowing it to both extract incremental revenue and diversify its revenue stream away from advertising revenue.
Content Syndication
To make up for the compressed subscriber base on its platform, Twitter promotes tweets on third-party platforms. The strategy has multiple benefits. First, the company is able to increase awareness of its service and win over new subscribers. Second, the company is able to offer its advertisers an expanded reach, thus allowing it to charge extra for advertising.
Flipboard is one of the platforms where Twitter syndicates its tweets and the strategy has had a positive impact on its growth.
It all comes down to collecting money
Whether it is about putting a great CEO on the driver’s seat or shaking up the product portfolio, the ultimate goal is generating more money over the long-term. Does it look like Twitter Inc (NYSE:TWTR) has a strategy in place to squeeze the most value from its platform?
Ad model shakeup: At Twitter’s recent earnings call, COO Adam Bain stated that they were making efforts to improve ad buying on the Twitter platform through better targeting and multiple bidding systems. The strategies are aimed at simplifying ad buying for marketers and also driving greater ROI for advertisers. As the company looks to target the nearly 9 million small businesses on its platform, simplified ad buying and placement is the way to go.
Increase in ad load. Twitter will, over time, increase ad load on its platform because the current ad load is only about a third of the platform’s carrying capacity. However, the company continues to explore other monetization strategies that boost ad revenue without impacting ad load. Twitter’s CFO, Anthony Noto revealed that auto-play videos contributed to the 13% uptick in ad revenue in 3Q without any increase in ad load.
Pressures on Twitter
High investor expectations
In the near-to-medium term, Dorsey and his team at Twitter will continue to face the pressure of balancing short-term interest with long-term goals.
Platform complexity
The perception that some people have developed that Twitter is difficult to use may take time to undo.
Conclusion
Twitter Inc (NYSE:TWTR)’s turnaround will certainly not happen overnight, but it is achievable.
Disclaimer: The opinions and data expressed herein by the author are not an investment recommendation and are not meant to be relied upon in investment decisions. The author is not acting in an investment advisory capacity, nor is this an investment research report. The author’s opinions expressed herein address only select aspects of potential investment in securities of the company or companies mentioned and cannot be a substitute for comprehensive investment analysis. Any analysis presented herein is illustrative in nature, limited in scope, based on an incomplete set of information, and has limitations to its accuracy. The author recommends that potential and existing investors conduct thorough investment research of their own, including detailed review of the companies’ SEC filings, and consult a qualified investment advisor. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author’s best judgment as of the date of publication, and are subject to change without notice.