- Twitter acquisition of TapCommerce is one among various steps to drive Twitter revenues.
- Launch of app-install ads across the platform and also on MoPub ad Exchange will boost revenue over the coming quarters.
- The stock continues to trade at extremely expensive levels, making it a high risk investment at its current stock price.
Twitter (NYSE:TWTR), the leading micro blogging company has been taking rapid strides to improve monetization and engagement levels on the platform in an effort to sustain the extraordinary revenue growth. We think that the management’s strategy of native advertising, mobile advertising and focus on engagement is the right combination to improve the investment potential of the stock, currently trading at astronomical valuation multiples. Our today’s post focuses on some of the steps taken to drive monetization on the platform.
Twitter announces TapCommerce acquisition
Twitter announced on Monday (June 30) a deal to buy mobile advertising firm TapCommerce in its latest bid to boost its ad solutions for its advertisers. A number of online businesses today are focussed on aggressively acquiring mobile users. However, it is equally important to engage existing users so as to retain them and avoid a high customer turnover. This is something Tap Commerce focuses on by re targeting past web site visitors.
Tap commerce is involved in mobile and phablet retargeting, convincing consumers who have previously shown interest in your product/website, to open and use the apps on their mobile devices. The deal is once again an effort to establish new revenues streams for the company. Though the terms of the deal aren’t disclosed, re/code puts the deal value at $100 million.
App installation ads will drive Twitter revenue
Twitter also announced the launch of its app install ads, which will allow users to install mobile applications from an ad appearing within an app. The feature is being rolled out and made available across the MoPub ad exchange, with its 1 billion plus unique devices offering a huge potential inventory for ad sales on Android as well as iOS. This is apart from the app-installation ads which will begin to appear in the Twitter timelines of its 240 million Twitter user base.
App-installation ads have accelerated revenue growth for bigger rival Facebook, and Twitter hopes to leverage its hugely mobile oriented user base to a similar end. Facebook launched its app-install ads in October 2007. Quarterly mobile ad revenue has gone from $300 million in Q4 2012 to $1339 million in Q1 2014. In other words, Q4 2012 saw 23% of advertising revenue being generated from mobile against 59% in Q1 2014. The chart below shows the composition of Facebook advertising revenue based on source (mobile and PC).
|PC Ad Revenue (in %)||77||70||59||51||47||41|
|Mobile Ad Revenue (in %)||23||30||41||49||53||59|
Facebook’s mobile ad revenue has grown rapidly since the launch of app-installation ads on its mobile app, which is captured in the table below.
|Q4 2012||Q1 2013||Q2 2013||Q3 2013||Q4 2013||Q1 2014|
|Mobile ad revenue (in millions of $)||305.9||375||656||882||1240.2||1339.3|
While this strategy did propel Facebook revenues higher, Can Twitter’s app-installation ads provide a similar spark to the company’s topline?
According to a post on Seeking Alpha, Facebook generates 20% of its mobile ad revenue from app install downloads, which puts its Q1 2014 app install revenue at $270 million. Let’s assume Twitter, with its smaller user base, can generate app installation revenues which are 10% of what Facebook currently manages. That could lead to incremental quarterly revenues in excess of $25 million. Add to that the extraordinary growth potential of mobile and Twitter’s largely focused mobile user base and Twitter could be adding more dollars to its topline over the coming quarters.
Twitter management has taken the right steps to improve monetization on the microblogging platform through the introduction of new products as well as established new revenue streams like MoPub ad exchange revenues. These are moves which will continue to sustain the high rates of revenue growth the San Francisco based company is currently generating.
Does that make Twitter’s stock an attractive investment? The stock today trades at hugely premium valuations which remind one of the dotcom bubble of the late 90’s. A price-to-sales (P/S) multiple of 29 is hard to justify even considering the astronomical growth rates of Twitter revenues. Add to this the company’s marginal and inconsistent bottom line and negative free cash flow margin makes the stock a high risk bet.
While Twitter is well poised for topline growth, we would like to see some of that drip down to the bottom line and set right valuations which have run far too ahead of the fundamentals. We continue our bearish sentiment on Twitter stock, and reiterate our negative long term outlook.