- Twitter made some insignificant changes to Tweet lengths in the past week, and is focusing more attention on dynamic product ads.
- Furthermore, revenue is quickly decelerating with very little indication of improving profitability over the next three-years.
- When combined with the uninspiring comments from the CEO, investors have no reliable way of arriving at either a growth or value thesis.
Things really aren’t looking too good over at Twitter (NYSE:TWTR) as user metrics are unlikely to improve by much over the next several quarters. Since this is the underlying metric by which analysts and investors are measuring growth potential in the stock, investors should be wary of approaching the name. I believe part of the exasperation comes from Twitter’s slow move toward longer-length Tweets with feature improvements being incremental in nature. It’s like watching a basketball player shoot further from the three-point line than necessary, which is basically bad shooting… something Twitter’s been doing a lot of lately.
In recent news, Twitter removed restriction on the 140-character limit from @names along with media attachments and quotation of prior tweets. If this doesn’t make a whole lot of sense, you’re not alone in this, because the vast majority of users don’t use some of Twitter’s more unique HTML commands. It’s basically an incremental feature that will allow Twitter diehards to write two or three additional words before getting cut off again by the 140-character limit. This doesn’t improve the quality of a tweet by much, but it does allow longer responses to other tweets, which may stimulate the level of creativity for those wanting to punch out better one-liners to their followers.
Also read: The Shorts Are Coming For Twitter Inc
Recent commentary from sell-side analysts hasn’t been that supportive. For example, Michael Pachter the analyst at Wedbush covering Twitter was unimpressed by recent changes:
Even after Tuesday’s changes, Twitter remains difficult to use, particularly for those who are new to the platform or inexperienced. In addition, although experienced users understand the value of the platform, the company does little to persuade users of other social networks to give Twitter a try. As a result, many newer users have felt discouraged or disinterested, and eventually churned out, while converts from other social networks have not materialized to the extent that investors had hoped for in recent periods.
On the advertising front, Twitter seems to have abandoned the buy now button. Again, given the low conversion metrics of e-commerce on user timelines, it’s not surprising that Twitter isn’t going to pursue this approach much further. Instead, the company will focus on dynamic product ads, or carousal ads, which is e-commerce focused, and is similar to the buy-now button. What’s different is that it’s going to include a product catalog that can be sifted through before a purchase can be made.
Now, usually these purchases are done offsite, but it really depends on the SKU integration, and whether Twitter wants to generate revenue on a per thousand impression basis, or on conversion. If it’s based on conversion metrics, it’s going to be similar to eBay’s market place listing service and initial adoption will come from larger retailers given the high-level of ad optimization to maintain profitability and complexity of API integration (API opens up to third-parties in Q2). In other words, this could be a needle mover to ad revenue, as Facebook has shown significant progress with this format. However, given the high-reliance on pricing growth to sustain sales ramp in recent quarters, it’s unlikely to drive y/y comp acceleration.
When talking strictly numbers there’s not a whole lot to get really aggressive off of. In a note released by Ross Sandler from Deutsche Bank it was noted that ad revenue growth is slowing and contribution from the 2016 summer Olympics isn’t quantifiable:
Twitter called out weakness in demand from Retail, QSR (quick service restaurants), and Tech verticals in 1Q. Management also stated that some large advertisers are delaying budget for Olympics and European Soccer, but largely that the overall level of demand for ads is lower than last quarter, consistent with some of our industry checks. As a result, 1Q16 revenue came in at $595M, the low end of guidance range, and TWTR guided 2Q flat sequentially, well below DB/consensus. Some of the 1Q weakness was attributable to some cannibalization of Promoted Tweets by Video ads. But weak demand appears to be the primary driver, especially in March and into 2Q.
So, given the weakness in revenue comps due to slowing ad-price growth, diminished inventory utilization and slower q/q user growth we’re witnessing Twitter transitioning to the infamous “maturation stage” well ahead of multi-year buy side models. I believe a lot of sell side analysts were pretty convinced that the growth story was limited, but nonetheless the broad view has shifted quite considerably especially among investors. To put greater context behind model revisions, I want to mention that Heath Terry from Goldman Sachs reduced his revenue estimate for FY’16 to FY’18 by 5.5% for each year, which translates to revenue of $2.773 billion (FY’16) $3.548 billion (FY’17) and $4.443 billion (FY’18). This implies a 26.6% growth rate between FY’16 and FY’18, which is a lot lower than the historical five-year 140% average sales growth.
Basically, things are decelerating really quickly. It only became apparent that user metrics would stagnate, ad pricing and ad load would disappoint in the past 12-months. Furthermore, there’s an almost zero percent likelihood of Twitter reaching GAAP profitability over the next three-years even in a rapid cost reduction scenario. This is my impression from the analysts I have surveyed, as negative EPS metrics remain embedded for the next three-years in conjunction with rapid deceleration of revenue, which diminishes the viability of a momentum/growth driven thesis. On the other hand, since Twitter is unlikely to be profitable, no one can define an easy value case either, as value comps are difficult when a company is unprofitable.
Twitter’s CEO Jack Dorsey's response to a frustrated shareholder at the shareholder meeting was the same regurgitated commentary we’ve heard over the past couple years. Here’s a brief excerpt from The Wall Street Journal:
Mr. Dorsey acknowledged the product’s weaknesses and asked Mr. Miller for more time. “We know that there are areas of the product that people don’t understand,” he said.” They don’t understand how it works and it’s inhibiting a lot of usage. We’re focused on the one thing that we can control, which is building an experience that people want to use and experience every single day. It’s going to take time.”
No one is going to change their multi-year revenue model off of an open-ended statement pertaining to product feature improvements. It’s not only difficult to model MAU trends, but it’s become difficult to articulate another inflection point following a pattern of declining user growth. Last time I checked no one on Wall Street uses a trinomial function to model revenue, and while Dorsey's comments might remind us of potential recovery in users, it's more of a show-me narrative at this specific juncture in time.
We’re stuck between speculative or highly speculative territory. I continue to reiterate my cautious stance, and would advise you all to avoid this company. Until the dust settles, I can’t convey an investor thesis in either direction, nor can I state with certainty that the concept has completely failed, as there’s still a dedicated base of users.