- We understand the bearish sentiments. They are well-founded. Investors have lost ~74% in Twitter stock in just 12-months and that is very unfortunate.
- But what we don't understand is people forming a bearish Twitter argument solely on MAUs. We believe that MAUs is a non-comprehensive metric of evaluating the way forward for Twitter.
- We introduce irregularities in the dependence on MAUs in an effort to aid investors in creating robust discussions around Twitter moving forward.
Take the restaurant industry for example. To create a revenue schedule in DCF Analysis or to choose a good comparable company for Precedent Transaction Analysis, the number of restaurants is used to predict revenue growth and to find good comparable M&A transactions respectively. This works. The total number of restaurants is vital. But if used in isolation, your results will not be close to the truth.
Let's look at some examples.
"Through subsidiaries, Darden owns and operates more than1,500 restaurants that generate $6.8 billion in annual sales." - Darden Restaurants Frequently Asked Questions.
"Revenue increased 9.6% to $4.5 billion....We opened 79 new restaurants during the quarter, bringing the total restaurant count to 2,010." - Chipotle's Q4 2015 Press Releas.
McDonalds (NYSE:MCD) vs. Yum Brands (NYSE:YUM): McDonald's revenues are ~49% higher than Yum! Brands' FY2015 revenues even though Yum! Brands total restaurants are ~18% higher than those of McDonald's.
"McDonald's is the world's leading global food service retailer with over 36,000 locations in over 100 countries." Total revenues of $25.413 billion for FY 2015 - McDonald's Reports Fourth Quarter And Full Year 2015 Results News Release.
"Yum! Brands, Inc., based in Louisville, Kentucky, has over 42,500 restaurants in more than 130 countries and territories. Yum! is ranked #228 on the Fortune 500 List with revenues of over $13 billion in 2015." - Yum! Brands Reports Fourth-Quarter Results.
The key points here are:
- Is the number of restaurants indicative of growth? Definitely not.
- Would someone be misled and be wrong if they used the total number of restaurants to form an investment decision? Absolutely.
- Anyway, what's the point of all this? To show that you can be as wrong on Twitter by only using its MAUs to form any investment decision.
MAUs Only Scratches The Surface
Let's look at Twitters Monthly Active Users' ("MAU") from a different angle. Instead of looking at Twitters user growth alone, we will instead focus on how much revenues Twitter makes per MAU.
To start with, Twitter makes approximately $2.0 per MAU as of last quarter. Twitter reported $569 million in quarterly revenues with $142 million in EBITDA. The company also reported MAUs totaling 320 million and 307 million excluding SMS Fast Followers. That translates to ~$1.778 in revenues per monthly active user in Q4 2015.
To put that into perspective, we will do the same analysis with Facebook (NASDAQ:FB). Facebook's average street estimates were earnings of 68 cents a share on revenues of $5.67 billion. But the company exceeded expectations by reporting earnings of 79 cents a share on $5.84 billion in revenues for the quarter.
"It's doom and gloom all around us and these guys (Facebook) are just killing it," Kevin Landis, CEO and chief investment officer at Firsthand Capital Management, told CNBC's "Closing Bell." "One of the really impressive things about this is: Look at all the other companies in this space, and there's train wreck out there." - CNBC.
The highlights of this outstanding quarter were the monthly active users across Facebook's different platforms.
- WhatsApp has ~1 billion MAUs
- Instagram has ~400 million MAUs
- Messenger has ~800 million MAUs
- Facebook has ~1.59 billion MAUs
Look at Facebook's statistics. It had 1.59 billion MAUs as of December 31st, 2015 and reported revenues of $5.8 billion or ~$3.648 in revenues per monthly active user. Meaning that Facebook makes ~51% more money per MAU than Twitter. This is a huge difference until you look at Facebook's MAU as an aggregate of all MAUs across its platforms.
Now add the MAUs across its other platforms: 400 million MAUs from Instagram and 1 billion MAUs from WhatsApp. That would bring the total MAUs to 2.99 billion. Meaning that overall, we are looking at $1.940 per MAU in Q4 2015 . This means that Facebook now only makes ~8.34% more revenues per MAU than Twitter.
Some Key Take Aways
Therefore, MAUs is a good catalyst for growth but a lack of it does not mean that the company will cease to exist.
Secondly, Twitter has a small, stagnant user base but it is a loyal, powerful and profitable small user base. That is an invaluable asset that speaks about the company's longevity.
Twitter is expanding its reach to non-users. Anthony Noto said that "we have reached a point now where we have billions of impressions of our tweets on Google's platforms everyday." That provides increased traffic to Twitter that can help advertisers reach beyond the Twitter audience.
This means that Twitter is expanding its reach and looking at MAUs alone will not be able to give the full picture.
MAUs Becoming Less Significant
Twitter is attempting to make everyone heard by trying to make tweets available to people outside its ecosystem. The partnership with Google where non-users can access tweets on Google is an example of that. This is not necessarily going to help add more MAUs but it would help advertisers reach more people and subsequently help with Twitter's revenues over time.
Moreover, we believe that as tweets become mainstream and available through Google searches the need to actively join Twitter becomes less relevant. But this does not mean Twitter cannot make money out of non-users.
Advertisers Are There
Twitter crossed an important milestone of 100,000 active advertisers that was largely driven by the companies small business initiative.
"Together with our logged out audience of over 500 million people, which is still growing sequentially, that's over 800 million people who use Twitter owned and operated properties every single month, and that doesn't include the over 1 billion unique visits monthly to websites with embedded tweets." - Jack Dorsey, Twitter CEO.
Advertisement consolidation. Companies that will not be able to afford Facebook or Google or companies that need to advertise to real-time audiences or companies who believe Twitter speaks better to their intended demography will always be available.
The challenge is that Twitters 100,000 active advertisers are driven by small businesses. Small businesses have lower budgets to spend on advertising. Therefore, acquiring big clients to advertise their brands on Twitter will help increase revenues at a cost-effective pace.
My Take - Own Live News!
The company has and can still afford to experiment but these experiments need to translate into shareholder value.
We believe that one of Twitters weaknesses can be its greatest strengths. Twitter is narrow, focused and simple. This means that it cannot appeal to everyone. It only attracts a unique demography. This poses a huge strategic challenge for management and investors from a user growth perspective. We are seeing this challenge continuing to persist in the future. This is why we believe that reaching non-users through Google can increase platform engagement and allow advertisements to reach more people but not so much MAUs.
However, there is tremendous value in being able to create a global discussion forum where it would be easier for users and non-users to effortlessly enjoy tweets, see tweets happening in real-time and make it easier for anyone to participate. We acknowledge that Twitter has grossly underperformed and has a very bumpy road ahead, but we believe that the brand is still strong, user base is very loyal though declining and the business model is shifting and diversifying away from dependence on MAUs. This is why we think MAU is not a comprehensive metric to gauge sustainability.