- Twitter has acquired native ads focussed start-up Namo media.
- The acquisition, in combination with MoPub ad exchange, could help to drive monetization on the Twitter platform.
- However, Twitter continues to trade at valuations levels which are clearly cut off from the underlying fundamentals.
Twitter (NYSE:TWTR) seems to be going to every possible length to get its monetization strategy in place. Following the acquisition of ad-exchange Mopub in 2013, Twitter recently inked a deal with Omnicom, which were both steps to up its monetization game. The latest move in the monetization game has been the acquisition of a start-up named Namo Media.
Namo media could improve monetization
Twitter acquired MoPub, a mobile focussed ad exchange, in order to facilitate automated buying and selling of ad-space on the 140 character platform. The move helped Twitter get a strong foothold in the mobile ad-space and though Twitter inventory isn’t currently being sold through the MoPub exchange, it is only a matter of time before that happens. Namo Media is yet another acquisition which could take the monetization strategy ahead. Namo Media is prized for its technology, focussing on native advertising, making online advertising less intrusive from a user experience point of view.
A combination of Twitter inventory made available the MoPub ad-exchange with an integration of native advertising could lead to the next big push in the monetization of the Twitter platform. The Namo media acquisition is a clear attempt to focus on the revenue per user, to continue the extraordinary revenue Twitter has displayed. Twitter as a company is making the right calls but does that mean Twitter as a stock is right for investors?
Twitter: Valuation and revenue per user growth
While native advertising could drive Twitter’s monetization strategy and result in improved revenue per user, will that be enough to justify the current valuation levels and growth priced into Twitter stock? As stated in our earlier post, Facebook (NASDAQ:FB) today generates a revenue per user which is 2x Twitter’s revenue per user. The quarterly revenue per user comparisons are displayed in the chart below.
To drive monetization and revenue, engagement on the platform needs to be enhanced. However, the Y/Y trend of Twitter’s user engagement metrics suggests falling engagement rates among the users.
Let’s assume that Twitter, in spite of falling engagement rates over the last two quarters, will be able to improve monetization and will achieve Facebook’s revenue per user rate. At a quarterly revenue per user of $2, Twitter could clock quarterly revenue of $510 million. It could mean annual revenue in excess of $2 billion. Given Twitter’s current market cap of close to $20 billion, it would still represent a price-to-sales ratio of 10, which is still expensive, if not insane.
Twitter Valuations continue to remain at risky levels
The scenario of doubling the revenue per user is a hugely optimistic view, which looks too good to be true when we see the trend of a falling engagement rate. With the other lever of growth, user base growth also showing a worrisome picture, Twitter’s valuations goes from expensive to highly risky. Therefore, while the move to acquire Namo Media is a step in the right direction, an entry into Twitter’s stock at its current price levels is a high risk which we would avoid. Twitter fits the bill of a great company with expensive valuation. We reiterate our negative outlook on Twitter stock. View Twitter stock analysis here.
To see Twitter’s latest stock price movement, click here (NYSE:TWTR)