- Twitter will report its Q2 2014 earnings later this month.
- Twitter management has taken various steps to improve monetization on the platform, which is critical to sustain Twitter’s topline growth.
- Twitter monetization metrics will be in focus on account of slowing user growth and focus on monetization.
Each of the big social media and technology companies have been busy over the last couple of months focussing on the highly lucrative video advertising market and trying to channelize more advertising dollars into their coffers. Twitter (NYSE:TWTR) is the youngest of the listed social media companies and has outpaced its bigger and more established peers, Facebook (NASDAQ:FB) and LinkedIn (NYSE:LNKD), over the last few quarters. The chart below compares the Y/Y growth in quarterly revenues over the last few quarters.
Each of these three has taken a number of steps to boost monetization and engagement levels across their platforms. While Twitter has clearly grown faster than its bigger peers over the last few quarters, we believe it could sustain its extraordinary growth rate over the coming quarters.
Monetization is a key driver of Twitter’s revenue growth
Twitter’s extraordinary topline growth has been met with skepticism by investors who have taken notice of its slowing user base growth.
Twitter’s revenue has two major drivers of growth; User base growth and improving monetization. With its slowing user growth, the improving monetization has been a silver lining in Twitter’s financial performance. The chart below displays Twitter’s monetization metrics over the last few quarters.
Twitter’s extraordinary growth rate has been held up for a large part by the improved monetization, which has made up for the marginal growth in user base. Therefore monetization has become a critical focus of Twitter’s growth story.
Recent moves will improve Twitter monetization
Of the two levers of Twitter’s growth, management has rightly focussed on improving monetization across the platform and establishing new revenue streams. The company has made a number of recent moves, which we believe will drive monetization higher over the coming quarters. The result will be Twitter’s ability to sustain its extraordinary topline growth rate.
Twitter acquired Namo Media in June to boost native advertising and enhance the user experience on the platform. This was followed by a deal to acquire SnappyTV, an acquisition which focussed on improving the engagement on the platform. The latest has been the launch of app-installation ads and experimenting with the buy now feature, an industry first move which could lead to higher monetization across the platform. Each of these moves is focussed on user engagement and revenue generation, which will both drive Twitter revenues over the coming quarters. We will review Twitter’s monetization metrics for Q2 2014 once Twitter releases its latest quarterly earnings.
In conclusion, Twitter monetization is set to improve over the coming quarters, but does this mean Twitter is a worthy investment? We believe that Twitter is definitely more attractive as compared to its early days of public listing. With the stock down from its December 2013 highs of $70 price levels and the expected monetization improvement to drive revenue growth over the coming quarters, an entry at the current levels could seem comparatively attractive. However, we still think the stock trading at a LTM price to sales ratio of 28 combined with Twitter’s unstable profitability and unproven cash flow ability continue to categorize Twitter as a high risk investment. It is a risk we will continue to avoid as there are safer and more attractively priced stocks in the market today.
We are bearish on Twitter stock. Our Twitter analysis rates the stock a "sell".