- Twitter shares have been rallying strongly on news that MasterCard is interested in partnering with it in P2P payment service.
- Twitter has also been moving on news that it has won a pivotal deal to stream NFL games.
- Twitter might not be bereft of growth opportunities as the market imagines which makes it a good contrarian play.
Twitter (NYSE:TWTR) shares have soared 10% after a report emerged that credit card company Mastercard (NYSE:MA) would be interested in pursuing a payment service partnership with the company. MasterCard's president of international markets told CNBC:
"We see companies like Facebook and Twitter occupying a really good space in social media and we are always over in Silicon Valley talking to those companies,"
"I think the way we would work with them is just the way we work with the other tech giants, we would figure out what we can do together, where our network could play into their space and connect up. Obvious spaces are if they want to offer payments to their clients and if you think about somebody like Facebook (NASDAQ: FB), it would probably be something like a P2P (peer-to-peer) service."
Perhaps more investors are aware of Facebook's P2P service than they are of Twitter's. Facebook launched a P2P service via Facebook Messenger in May 2015 which Facebook users in the U.S. can use to link to their MasterCard and Visa (NYSE:V) debit cards. A P2P service basically allows users to seamlessly transfer funds from their bank accounts to another person's bank account using a mobile phone.
But Twitter's P2P service actually dates back further than Facebook's. Twitter launched a P2P service in France in October 2014 through the collaboration with Groupe BPCE, France's second largest bank by total customers, in a service that allows users there to transfer money to other people via tweets. It's quite likely that Twitter is happy with the progress of the service in France and now wants to launch the same in the U.S.
It turns out that P2P is growing fast in popularity. Perhaps the best-known P2P service is PayPal's Venmo. During the last quarter, PayPal processed more than $2.5B, or ~3% of the company's TPV(Total Payments Volume) via Venmo. That was 174% Y/Y growth, so we can surmise that P2P is growing incredibly fast.
But that perhaps does not fully explain why Twitter shares made such strong gains on the news. It's more likely that the stock moved strongly due to shorts rushing to cover on the news. Although Twitter's current short ratio of 10% has dropped from the December highs of 12%, it's still high enough to cause significant movement in the stock whenever a positive catalyst emerges. The announcement about a possible partnership with MasterCard also coincided with news that Twitter has won a deal to stream Thursday night NFL games online against heavyweights such as Amazon (NASDAQ:AMZN), Yahoo (NASDAQ:YHOO), Facebook, and Verizon (NYSE:VZ). This win is viewed positively because it gives Twitter a key piece of content to attract users and reinforce its quest to become the leading platform where people go to discuss live events.
It's also quite likely that investors still see Twitter as a good takeover candidate by MasterCard. But this is mere speculation at this point although such a possibility cannot be completely ruled out.
Ultimately the latest moves by Twitter help to buttress my thesis of Twitter being a good contrarian play. Twitter stock had been selling off quite heavily after Barron's said that the company's best days are long behind it. The columnist highlighted several well-known issues, key among them was Twitter's slowing MAU growth. To be sure, Twitter’s 320M MAUs is a far cry from Facebook’s and Google’s 1.5B. Social networks such as Twitter, Facebook and, LinkedIn (NYSE:LNKD) are judged heavily on the number of users they are able to attract. Marketers usually gravitate more towards social sites with a large number of users. In this regard, Facebook is able to attract much better ad rates (CPM and CPC) than either Twitter or LinkedIn.
The analyst also talked about a recent survey by RBC Capital Internet on 2,000 marketers that ranked Google and Facebook top for giving the best ROI for marketers, Twitter and LinkedIn were ranked in the middle of the pack while Yahoo and AOL were ranked last. The analysts talked about the survey findings where 62% of FB marketers, 54% of Google’s but only 32% of Twitter marketers said they planned to increase their ad spend on the platform. I don’t want to sound like a Twitter apologist but these results are pretty consistent with the ROI rankings by the marketers so no surprises here.
The analyst, however, noted correctly that Twitter still sports highly impressive growth metrics. Twitter finished 2015 with revenue growth of 58% and EPS growth of 186%. Meanwhile, the company's losses have narrowed down considerably.
Twitter’s ARPU, or Average Revenue Per User, at this stage of growth is actually slightly better than Facebook’s at a similar growth stage:
Twitter has been able to maintain healthy top line growth despite a slowdown in MAUs. Twitter’s ad engagements grew 153% Y/Y during the fourth quarter thus easily offsetting a 41% decline in ad pricing.
Twitter can continue growing user engagement as it continues to implement its native autoplay video integration program. The social site reported that video views grew a hefty 220x during the last quarter.
Twitter can also continue improving its site to make it easier to use, as the company pointed out during its earnings call:
"We are going to fix the broken windows and confusing parts, like the .@name syntax and @reply rules, that we know inhibit usage and drive people away."
But perhaps Twitter’s biggest growth opportunity lies in monetizing logged out users by displaying ads to them. Twitter has about 500M logged out users. The company estimates that it can monetize logged out users at roughly half the rate of active users. If Twitter is able to successfully monetize just half of its logged out user base, it can expand its revenue base by about 42%.
Twitter’s latest moves have been powering a strong rally in Twitter stock price. Perhaps investors realize that the company is not completely bereft of growth opportunities. Ultimately, I see a situation where Twitter shares could rally as much as 30%-40% over the next 6-8 months as Twitter continues growing its top line and the market starts realizing that the company still has sizable growth runways ahead of it.