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Recent price: $30.30
Timeframe: 3-6 Months
Thesis
Twitter
is a platform for real-time conversation and self-expression as well as being a broadcast network. It is focused on delivering advertising to its active user base. The company has multiple growth drivers and is uniquely positioned to benefit from digital spending growth.
The Last Quarter
Twitter’s third-quarter results were dismal, with revenue at $824 million (+9% year over year), 6% below consensus. Earnings before interest, taxes, depreciation, and amortization (Ebitda) were $298 million, 7% lower than consensus. Nevertheless, Twitter has sustained its recent recovery in audience growth as total average monetizable Daily Active users (mDAU) rose 17% year over year to 145 million, versus the 142 million expected.
Revenue growth in the third quarter was impacted by 3% ($23 million) from MAP (Mobile Application Promotion) issues. Lower-than-expected profitability was driven by the revenue shortfall as operating expenses were roughly in line. Weaker seasonality in July and August rebounded in September.
International revenue grew 7% year over year, and Japan (their second-largest market) was down 1% year over year (Last year it grew 44% year over year.) MAP is a bigger part of the business in Japan than it is in other geographies, so it was more affected by MAP issues and tough year-over-year comparisons.
The revenue miss was due to bugs primarily affecting MAP. The bugs affected the company’s ability to target ads and share data with measurement partners and ad partners.
MAP is a tool that advertisers use to promote their smartphone apps. Twitter can use device settings to figure out the best ads to show. It turned out that setting was not working properly, and once Twitter discovered this problem, it turned off the setting in order to fix it. That had a negative impact on revenue, because Twitter received fewer inputs to figure out which ads to show people.
The second specific issue with MAP occurred where the company typically shares data with measurement partners who will then share with advertisers, in order to monitor the effectiveness of their campaigns.
Users can authorize Twitter to share their data with measurement partners, but that setting was not working as expected.
Twitter said it had unintentionally used personal information such as phone numbers and email addresses (provided by users to make their accounts more secure) to target advertising. Therefore, they misused data gathered for security purposes to bolster their ad targeting capabilities. They are not able to quantify with certainty how many people were affected.
Both bugs relate to an issue first disclosed in August, when Twitter admitted it had failed to obtain consent from some users to share “certain data” with advertising partners and other third parties. The problem with users’ privacy settings emerged in May 2018 and was fixed in August 2019. Twitter also said that it had shown some users personalized ads without their permission for almost a year. In August, Twitter notified Ireland’s Data Protection Commission, the regulator overseeing compliance with General Data Protection Regulation (GDPR), that it might have breached the privacy rules. There is a possibility Twitter could face an investigation over the issue and that this could lead to further problems and management distraction in coming quarters.
Once it addressed these mistakes, Twitter had less data available to target ads, which negatively affected the prices it was able to charge to advertisers.
The next quarter’s revenue growth will be affected by the product issue. EBITDA numbers came down and operating expenses are worrisome, as it is reasonable that they grow at 19% for this year. Anyway, 2020 and 2021 could see a sequential improvement event, although the current stock price and sentiment are discounting lower growth and higher costs.
Having said that, there are many moving parts and, in my opinion, it is time to be constructive on the story before all the stars are aligned. Twitter is now a show-me story and needs to inflect revenue growth to rebuild confidence.
Some underlying trends are already positive and could get further traction in the short term.
Engagements increased about 23% (primarily from increased ad impressions driven by audience growth and improved click-through rates across most ad formats) and continue to grow greater than DAU, meaning they are selling better formats, they are selling more relevant ads, and putting more relevant ads in front of people.
On the contrary, Cost per Engagement (CPE) was down 12%, reflecting a mix shift from MAP to video ad formats. CPE is an output of the ad auction process and varies based on geographic performance, auction dynamics, and the strength of demand for various ad formats and campaign objectives.
Video ad formats (which have lower CPE) is a good example to show there is a big opportunity putting better ads without selling more. More than half of video ads are served at longer than 15 seconds, but the completion rate for 6-second videos are much better and this is a great opportunity to provide better ads.
Developments
Conversation is Twitter’s huge strength. Promoting more conversation ensures Twitter is the place where people go to see and talk about what is happening. Making it easier to participate in conversations, organizing around interest and events, and making it easier for people to find what they are looking for when they come to the app will drive more people to enjoy Twitter every day.
This requires new initiatives in order to fuel robust conversations on the platform, new content able to grab audience interest, and appealing events. I think the company has already started to move in the right direction and their efforts will materialize in the coming quarters.
A renewed focus on onboarding is another major shift in the right direction. They are experimenting with a new onboarding experience more focused on interests, events, and topics to get people to these interests much faster. People are immediately seeing tweets that interest them and it is easier to build the right following graphs on top of that. This could be a great catalyst given that 2 million people come to the platform everyday who have not been on the service for a month or more, and one-third of them have never been on the platform before. Twitter is working to keep them on the platform and monetize their presence in the right way.
Video continues to be a powerful medium on Twitter, enabling people and content owners to better share experiences, engage in events, and converse with broader audiences. In the third quarter, Twitter announced a number of new live and on-demand video content partnerships that highlight a unique value proposition for content publishers, coupling compelling premium live video with real-time audience engagement.
Twitter has new initiatives with previous partners including the NFL, ESPN, Viacom, Major League Soccer, Live Nation, and
Activision Blizzard.
Twitter unveiled a deal with Univision Communications to bring more premium sports, news and entertainment content to the social network’s U.S. Hispanic users.
As part of a multiyear partnership extension with Twitter, the NFL will continue to program video highlights, breaking news and analysis, and will also include new live shows.
Together with their partners, they developed new customized programs for their audiences, offering advertisers new opportunities to connect with influential and receptive audiences.
The Wall Street Journal is launching WSJ What’s Now, a new franchise that will bring enterprise reporting, business analysis, and markets insights to Twitter in an original video format.
For the first time, TIME will develop content exclusive to Twitter to bring exclusive insight into the discussion around Person of the Year and TIME 100, including live-streams, Moments, and more.
Using a series of short-form livestreams on Twitter, MTV will ask fans to decide which audience member they’d like to watch on a live reaction cam or follow backstage and behind the scenes during the show’s biggest moments.
Events are big opportunities, and 2020 has three major events: the U.S. Presidential election (and its campaign), Euro Cup soccer, and the Olympics. These are likely to have a positive effect on traffic, revenue, and mDAUs.
The Olympics is for sure an appealing event for advertisers and Twitter’s completion of its deal with NBC a year ahead of the event gives Twitter time to attract more advertisers. It is clear Japan is still an exciting opportunity and the Olympics will show the improved MAP version impact on their second most important market. NBC Olympics in the United States is designed to amplify NBC Olympics’ vast coverage of the 2020 Tokyo Games by creating a daily original studio program live from Tokyo each morning. A daily poll that will allow fans on Twitter to choose one live look-in to NBC’s Primetime or Primetime Plus broadcasts each night, and short-form video highlights throughout each competition day.
The health of the platform remains a founding pillar and therefore a top investment priority to help people find credible information and feel safe participating in the conversation. During the quarter they gave people more control over their conversations on Twitter with the launch of auto-moderated replies in the U.S., Canada and Japan, improving the ability to proactively identify and remove abusive content. Twitter took down more than 50% of abusive content without the need of a bystander or first-person report, with a sequential improvement from the 43% in the second quarter of this year and and 38% in in the first quarter.
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