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Investment Overview for Twitter (NYSE:TWTR)
Below we highlight key drivers of Twitter's value that present opportunities for upside or downside to its current Trefis price estimate.
United States Advertising
- U.S. Average Monthly Active Users: We currently forecast this figure to increase from 51 million in 2013 to 110 million by the end of our forecast period. However, there could be an upside of about 20% if this figure was to reach 150 million instead.
- U.S. Ad Revenue Per 1,000 Timeline Views: We currently forecast this metric to increase from $2.7 in 2013 to $9.2 by the end of our forecast period. However, there could be a downside of about 15% if this figure was to increase to only $6.5. On the other hand, if Twitter's ad monetization grows much faster than we forecast driven by higher inventory sell through and increased pricing, and the U.S. ad revenue per 1,000 timeline views reaches close to $12.0, there could be 15% upside to our price estimate.
- International Average Monthly Active Users: We currently forecast this figure to increase from 173 million in 2013 to 433 million by the end of our forecast period. However, there could be an upside of about 10% if this figure was to reach 530 million instead. There is some likelihood of this outcome given the growing smartphone usage across the globe and increasing adoption of Twitter by celebrities and political leaders.
- International Ad Revenue Per 1,000 Timeline Views: We currently forecast this metric to increase from $0.36 in 2013 to $2.36 by the end of our forecast period. However, there could be a downside of about 10% if this figure was to increase to only $1.70. On the other hand, if Twitter's ad monetization grows much faster than we forecast driven by higher inventory sell through and increased pricing, and the international ad revenue per 1,000 timeline views reaches close to $3.0, there could be 10% upside to our price estimate
Twitter is an online platform for self-expression and real-time conversation. The updates and messages posted by users are termed as 'tweets,' and are limited to 140 characters. This essentially enables a quick exchange of information, while maintaining the conciseness and relevance of the messages. The company had close to 284 million average monthly active users during the third quarter of 2014.
Twitter earns revenue through advertising and data licensing, with the advertising business accounting for a majority of its revenues. The company charges advertisers and marketers for promoting their tweets and Twitter accounts. Additionally, it charges data re-sellers for access to user tweets. Ninety-four out of top 100 ad age advertisers used Twitter's services in 2013.
We believe that the United States Advertising business is the primary source of value for Twitter because:
Significantly Higher Ad Monetization Compared To International Business
The U.S. accounted for approximately 66% of Twitter's revenues in Q3 2014. Although the international business is growing, the monetization level remains much higher for the U.S.
Advertising revenue per 1,000 timeline views stood at an estimated $2.68 for the U.S. in 2013, approximately 7.5 times the corresponding figure for the international segment. We notice a similar discrepancy for Facebook as well, which is a much more mature and profitable company. As there are structural reasons for this disparity, ad monetization in the U.S. may remain significantly higher for the foreseeable future. The average ad pricing in international markets is lower due to lack of purchasing power. In addition to this, the online advertising hasn't picked up in many of the emerging markets as much as it has in the U.S.
Growing Popularity Of Social Networking Platforms
With the proliferation of smartphones, tablets and laptops, mobile computing, and in turn the Internet, are now ubiquitous. Users can communicate within the range of any wireless LAN or cell phone tower. And for this, these devices allow users to employ a wide range of social media, each optimized to a specific purpose.
Facebook's monthly active user base has increased from about 100 million in 2008 to close to 1.35 billion currently. The figure for LinkedIn also jumped substantially in 2013. Twitter is not behind either, and witnessed its total monthly active users grow by 73% in 2012 and 40% in 2013.
Growing Online And Mobile advertising
The online advertising market is growing, and mobile is going to be the forefront of this growth in the coming years. Google has long dominated this market but Facebook, LinkedIn, and now Twitter, are beginning to tap the opportunity.
According to Twitter, the global online advertising market (excluding mobile) is expected to grow from $91.1 billion in 2012 to $124.7 billion in 2017, reflecting a compounded annual growth rate of 6.5%. During the same period, global mobile advertising market is projected to increase from $10 billion to $52.2 billion, which suggests that the proportion of mobile in the overall online advertising market will increase rapidly. This plays right into Twitter's hands as the company earns more than 80% of its revenues from mobile platform.
Real-time Interaction Gaining Traction
Due to increasing Internet access and usage of mobile devices, users are increasingly getting involved in real-time interactions online. And this plays to Twitter's strengths. A lot of events, news and incidences are reported on Twitter much before they are reported by traditional news sources. The company has stated that the user engagement on Twitter peaks during live events.
How Does Trefis Modelling Work?
How do we get the historical numbers for this chart?
Trefis has a team of in-house Analysts who gather historical data from company filings and other verifiable sources. When historicals are available, we explain how we got them at the bottom of the Trefis analysis section below.
Who came up with the Trefis forecast for future years?
The Trefis team of in-house Analysts considers a variety of factors when projecting any forecast. The rationale for our projections is explained in the Trefis analysis section below.
How does my dragging the trendline on the chart impact the stock price?
- We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
- We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.
See more on: DCF Methodology
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