- Twitter valuations have run up after strong user growth in Q2 2014.
- Twitter's recent update suggests, user base is smaller than 271 million users.
- Our Twitter stock analysis rates it a sell at its current valuations.
The run up in Twitter (NYSE: TWTR) stock price suggests that investors are now less concerned about the company’s sluggish user growth. But have things really turned around for the micro-blogging site? As per the company’s updated earnings presentation, 11% of its active users solely used third party applications to access Twitter. What’s more, some of these users used third party applications which might have automatically contacted Twitter’s servers. The development also indicates that Twitter’s user monetization rates and user engagement levels are higher than they appeared to be initially. If user growth is the criteria, all may not be hunky dory, as valuations seem to have priced in a bigger user base than there actually is.
Twitter has seen two earnings seasons since it went public with its much anticipated IPO in November 2013. The company’s stock has dived following both its earnings releases so far, driven by concerns about user growth. Twitter’s earnings announcement in Q2 2014 saw the company’s user growth rebound, with strong user engagement growth to complement its stellar revenue growth. The result was a 20% jump in the stock price, on the day after the earnings release. Given the recent update on active users, one would wonder if the celebration was premature.
Twitter User Growth
After a good run in FY 2012, Twitter’s user growth consistently declined in FY 2013 raising concerns about the scalability of the micro-blogging platform. In Q1 2014, user growth rebounded with a user addition of 14 million Monthly Active Users (MAUs). User growth has typically been higher in Q1. Further, YoY growth in users continued to decline during the quarter leaving investors disappointed with Twitter’s user growth.
In Q2, the company’s user base grew to 271 million MAUs. The YoY growth in users was still marginally slower than that of Q1. In absolute terms, the company added 16 million MAUs, its highest user addition in 5 quarters and higher than its average user addition over the last 12 quarters.
Twitter’s User Base On Third Party Apps
While things appear to have turned around, here’s where the problem lies. In the section titled ‘A Note About Metrics’ in Twitter’s Q2 earnings presentation, the company announced that approximately 11% of its active users solely used third party applications to access Twitter. This implies that about 30 million users did not access Twitter’s mobile app or website, thus reducing its monetizable user base to about 241 million MAUs.
A WSJ article has detailed the implications of the announcement. One must note here that the article carries the old number of 14% from Twitter’s original presentation, which the company later revised to 11%.
A positive here is that, though these users can’t be monetized by Twitter, it’s likely that they added to the user engagement experience with the content they shared. These positive contributions might be very limited considering the following statement in the same presentation:
“However, only up to approximately 8.5% of all active users used third party applications that may have automatically contacted our serves for regular updates without any discernable additional user-initiated action.”
Twitter’s valuations went through the roof post its Q2 2014 earnings release. The stock currently trades at a price of $45 a share. Twitter’s price to sales ratio of 28.3 reflects its astronomical valuations which could make it vulnerable to any change in market sentiment. Facebook’s price to sales multiple of 19 translate to relatively much more attractive valuations, more so because Facebook has about 5 times Twitter’s users and continues to grow at a healthy rate of about 60% (Q2 2014). Further, Facebook is also profitable with net profits margins in the 20s.
Twitter’s revenue growth has been stellar and has been accelerating over the last few quarters. As we had highlighted in our Twitter earnings review, the company’s monetization rates are likely to continue to improve. The monetization rates may not be able to drive long term growth if user growth doesn’t keep up. We would also be keen to see how user engagement metrics look in Q4, since Q3 is likely to be impacted by higher engagement levels during the FIFA World Cup.
As for Twitter’s user growth concerns, it’s now a difficult metric to assess, since these third party app user numbers aren’t available every quarter. However, the one thing that is clear is that Twitter’s user base is not as large as it seemed to be initially. Given that poor user growth overshadowed strong revenue growth in the previous quarters, it’s difficult to understand why Twitter’s valuations have swelled. Our Twitter stock analysis rates it a ‘sell’ at its current valuations.