Is There Any Hope For Twitter Stock In 2016 After The Latest Downgrades?

  • Twitter stock has endured a dreadful year in 2015, as its user growth slowed down drastically.
  • Twitter is now experimenting with trying to monetize its large number of  logged out users.
  • Can Twitter stock finally make a comeback in 2016?

Twitter (NYSE:TWTR) just cannot seem to catch a break or do anything good enough to get some Wall Street love. Twitter stock has endured a terrible 2015. The stock price is down 35% in the year to date, as user growth declined drastically.

TWTR stock chart

Source: Twitter stock price chart by amigobulls.com

Just when the investing world was starting to celebrate Twitter’s innovative move to monetize logged out users, part of Wall Street remains cynical and is saying that the move won’t do much to help Twitter compete with social media sites such as Facebook (NASDAQ:FB), Snapchat, and Instagram:

"[W]e find TWTR continuing to cede ground to faster growing competitors, such as Instagram and Snapchat, despite Twitter’s multiple product improvements made this year," Evercore's Ken Sena writes (Hold rating) after taking into account both November ComScore data as well as Evercore survey results. Sena cut his TWTR target by $3 to $22, which matches the Street’s low.

"Total minutes on the platform through November continue to falling in the mid-single digits domestically, while other social platforms demonstrate double-digit growth off of larger bases, with Instagram and Snapchat now 150% and 50% larger, respectively. This is in spite of multiple major product launches, including Moments as well as the partnership with Google. Although we do not have December data yet, the data through November suggests to us that the Street’s 325mm MAU estimate (or 5mm net adds, reflecting an acceleration from 4mm in 3Q) may be too optimistic, and we maintain our 323mm estimate."

Twitter Monetizing Logged Out Users

Twitter’s bold move to try and monetize logged out users has been met with mixed reactions, with some analysts viewing it as a good way for the company to better monetize its user base which is not growing as fast as hoped for, while others view it as an admission by the company that it does not see the user growth problem ending any time soon. Twitter has 320 million monthly active users, with another ~500 million non-active users.

Sena correctly observes that advertisers prefer networks with more scale to smaller networks such as Twitter. Twitter’s 320 million users compare poorly with Facebook’s more than 1.5 billion MAUs. Meanwhile sites such as Snapchat and Instagram enjoy much better engagement rates than Twitter does.

There is little doubt that Twitter has to climb a wall of worry as far as its user growth is concerned. Twitter’s userbase increased by just 2 million during the last quarter compared to last year’s comparable quarter, the company’s worst growth ever, and one which led many analysts to speculate that it was very close to hitting a peak. It’s only natural that Twitter tries to do something about its anemic user growth. Twitter plans to display ads to people who read tweets without logging in, who happen to be many more than people who actually log in. Sena and other Twitter bears really should be giving the thumbs up to Twitter for being innovative and thinking outside the box.

Despite a pretty dramatic slowdown in user growth, Twitter’s top line growth has remained remarkably robust. During the last quarter, domestic users increased just 3% yet revenue in this segment expanded a healthy 54% Y/Y. International MAUs increased 13% but revenue in this segment jumped 65% Y/Y. This clearly demonstrates that Twitter’s growth is not as closely tied to user growth, which is actually a positive sign. After all, there is not any company that can continue growing its user base at a brisk clip indefinitely. Twitter only looks bad when it’s compared to Facebook, but the fact that its top line is still expanding so fast means that all hope is not lost.

Wall Street should really be cheering Twitter’s efforts to monetize its logged out users instead of trying to kick the company when it’s down. To be sure, it’s not likely that ads displayed to logged out users will fetch good CPM rates due to the lower engagement. But lower CPM rates are usually tolerated well by investors as long as the top line keeps expanding at a fast clip. Google’s CPM rates have been falling for years, yet this has never been viewed as a big problem by investors as long as revenue kept growing. There is no good reason why Twitter stock should not make a comeback in 2016 if the company can demonstrate that it can successfully monetize its gazillions of logged out users.

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