Reduced Advertiser Interest Could Drag Twitter Stock

  • RBC Capital's recent survey suggests that marketers might cut ad spends on Twitter.
  • The survey of 2000 advertisers reflects the opinions of only a fraction of Twitter's 130,000 active advertisers.
  • However, the impact of cuts in ad spends by these marketers might not be marginal.

A recent survey by RBC Capital suggests that some marketers might actually cut their advertising spends on microblogging site Twitter, implying that there could be more trouble ahead for the company's already battered stock. The survey of about 2000 advertisers reflects the opinions of only a fraction of Twitter's 130,000 active advertisers. However, the impact of such a cut in ad spends might not be marginal.

Twitter, which recorded its first sequential decline in Monthly Active Users (MAUs excluding SMS Fast Followers) in its latest quarter, has relied heavily on its ability to increase ad engagement to drive revenue growth. Twitter's stellar growth in ad engagement has been compensating for plummeting ad prices and stalling user growth. However, if these marketers surveyed by RBC decide to spend less on the platform, it could take the wind out of all of Twitter's plans, including its strategy to monetize logged out users.

RBC Capital Survey Indicates Potential Trouble For Twitter

While RBC's survey found growing interest in online advertising with about 82% of respondents looking to increase their spends on online channels, the results weren't as encouraging for Twitter. While 32% of the respondents surveyed did plan to increase their ad spends on the platform, RBC Capital's Mark Mahaney noted a significant decline in interest among marketers, as quoted by StreetInsider:

"Regarding Twitter, 32% of respondents plan to “significantly” or “modestly” increase their Twitter ad spend -- the lowest level of spend increase intentions for Twitter that we have tracked over the past three years and a sharp fall-off from the 54% level in our February 2015 survey."

Further, about 23% of marketers planned to cut their spends on Twitter.

On a positive note, 29% respondents believed their ROIs (Return On Investment) had improved on Twitter. It's likely that these are the respondents who plan to increase spends on the platform. However, the larger picture does look duller than it has been in the past for Twitter. More so when you consider marketers' interest in rival platforms. Quoting from the post on StreetInsider:

"62% of FB, 54% of GOOG, 48% of YT, and 32% of TWTR advertisers expect to increase their ad spend on these platforms over the next year. Only 9% of FB, 10% of GOOG, and 8% of YT advertisers expect to decrease their ad spend on the respective platforms, tho 23% of TWTR advertisers expect to decrease their spend on that platform."

If the survey is anything to go by, Twitter is clearly falling behind.

What's Next For Twitter?

Twitter has been grappling with the problem of stalling user growth for a while now. The platform saw its first sequential drop in MAUs in Q4 2015. What's more, meanwhile, Twitter has also seen its ad prices plummet, with its CPE (Cost Per Engagement) falling by about 80% since Q1 2013, the first period for which this metric was made available. However, Twitter has managed to compensate for this and drive sales growth with an eye-popping ~32X growth in ad engagement during the same period.

As brilliant as that is, it's hard to see how Twitter can keep pushing up ad engagement to drive growth without damaging the user experience for its existing users, in the absence of meaningful user additions. In comes Twitter's plan to monetize logged out users on the platform, which total to about 500 million users, much higher than Twitter's MAU base of 305 million. Twitter recently ran a small pilot test, serving ads to logged out users and met with encouraging results according to the management's commentary during Twitter's Q4 earnings call:

"Although the test was small, the early results are encouraging. Initial performance from the pilot has shown that video view and click through rates for logged-out ads are similar to logged-in performance."

However, if ad-spends on the platform are cut, Twitter might not be able to leverage these logged out users the way they'd have liked to.

Twitter has made commendable progress in terms of adding active advertisers on the platform, almost doubling (90% YoY growth) that number to 130,000 active advertisers in Q4. This could potentially cushion the impact of cuts in ad-spends. However, most of the growth in advertisers has come from the addition of small and medium-sized businesses, which most often aren't the biggest spenders. Quoting from Twitter's shareholder letter:

"In fact, in Q4 more than half of all spend through MoPub came from Fortune 1000 brands."

The marketers RBC Capital has surveyed are likely to be the relatively bigger spenders. So, a cut here could potentially mean trouble for Twitter.

Conclusion

According to the survey by RBC Capital, Twitter is clearly falling behind its rivals in the online video advertising space, with marketers showing lesser interest in the platform. With stalling user growth and falling ad-prices, Twitter's best shot at driving revenue growth is to increase ad engagement and monetize logged out users. However, if the advertisers surveyed by RBC do cut spends on the platform, it's likely that Twitter will feel the heat, if not in Q1 2016, a quarter or two down the line. With the looming risks of a further slowdown in growth and mounting losses, investors would do well to stay on the sidelines and not buy Twitter stock.

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Neither Amigobulls, nor any members of its staff hold positions in any of the stocks discussed in this post. The author may not be a certified/registered investment advisor, and the opinions expressed should not be treated as investment advice. Buying and selling of securities carries the risk of monetary losses. Readers/Viewers are advised to carry out their own due diligence and consult their investment advisors before making any investment decisions. Neither Amigobulls, nor the author have any business relationship with any of the companies covered in this post.

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