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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 61 million in 2014 to about 100 million by the end of our forecast period. However, there could be an upside of about 20% if this figure was to reach 140 million instead.
- U.S. Ad Revenue Per 1,000 Timeline Views: We currently forecast this metric to increase from $4.4 in 2014 to $13.8 by the end of our forecast period. However, there could be a downside of about 15% if this figure was to increase to only $10. 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 $18.0, there could be 15% upside to our price estimate.
- International Average Monthly Active Users: We currently forecast this figure to increase from 213.5 million in 2014 to over 410 million by the end of our forecast period. However, there could be an upside of about 10% if this figure was to reach 540 million instead. There is some likelihood of this outcome given the rising pace of product changes being undertaken by the new leadership.
- International Ad Revenue Per 1,000 Timeline Views: We currently forecast this metric to increase from $0.82 in 2014 to $3.3 by the end of our forecast period. However, there could be a downside of about 10% if this figure was to increase to only $2.20. 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 $4.0, 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 320 million average monthly active users at the end of September, 2015. Excluding SMS fast followers, this metric was seen at 307 million.
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 Q4 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 $4.42 for the U.S. in 2014, more than five 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 is still picking up in many of the emerging markets such as India and Brazil.
User Growth Has Slowed Down On The Platform
Twitter’s monthly active users (excluding SMS fast followers)
increased by 2 million sequentially in Q2 2015 to 304 million in the second quarter, which represented an addition of just 2 million users during the quarter. During the third quarter of 2015, this metric saw sequential growth of 3 million new users to 307 million.
Though the management is taking a slew of measures to reinvigorate growth such as Project Lightning or Moments (based on real-time events), it remains to be seen whether these measures will translate into faster user growth at the platform.
Recent Introduction of Moments
In October 2015, Twitter saw the biggest product change in its history, with the launch of Moments (more popularly known as Project Lightning). The Moments feature provides the best of what’s happening on Twitter in real-time (around events, TV shows, and news) with a click of a button. It is edited by human curators and allows users to follow events without the need to follow individual accounts. We believe this recent product change is exciting, since it adds to the value proposition of Twitter.
Management Changes Have Taken Place Recently
Jack Dorsey’s appointment to the role has been made permanent by the Board, despite his other role as the CEO of Square. In other changes, Adam Bain has been designated to the role of Chief Operating Officer, along with appointment of Omid Kordestani as the Executive Chairman of the Board.
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 85% of its revenues from the mobile platform.
Though Ad Engagements Are Rising Rapidly On The Platform, The Cost Per Ad Engagement Is Rising Slowly
Ad load on the Twitter platform remains low at less than 2% (estimated) as compared to 5% for more mature social networks. During Q3 2015, whereas cost per ad engagement fell by 39%, total ad engagements grew by 165% on an year-over-year basis.
We think the company has a long way to go in terms of selling its ad inventory, and this is why the number of ads are growing. Additionally, it appears that currently there is oversupply which explains the decline in the average ad pricing. It is noteworthy that this trend is opposite to what Facebook is witnessing - In Q4 2014, overall number of ad impressions fell by 65% for FB; at the same time, average price per ad engagement rose by 335%. During the second quarter 2015 earnings call, Twitter's management indicated that ad load levels on the platform currently remain at around ‘one-third’ of the metric’s long-term potential.
Share Of International Ad Sales Is Rising
International ad sales rose by 141% during the fourth quarter of 2014, which was much higher than U.S. ad revenue growth of 78%. The share of international sales in overall sales has increased from 28% in Q1 2014 to 34% in Q4 2014 and we expect this proportion to continue to rise.
Twitter is expanding its sales presence across the globe and during Q4 2014, it added 13 new countries taking the total number of countries, where it has a sales presence to 73. In addition, it is also enhancing the reach of its self-service advertising platform (which primarily caters to small and medium-sized businesses) across additional markets and we expect these initiatives to propel sales growth in the coming quarters.
Passive User Base Could Also Be Monetized
Apart from the 307 million MAUs on its platform, there are more than twice as many users who come to Twitter-owned properties but don’t login or access tweets through syndication across the web. We believe that over the long run, Twitter will start monetizing this passive user base and this could also become a huge revenue stream for the company.
Recently, Twitter signed partnership agreements with Flipboard and Yahoo Japan to syndicate its ads across their respective web properties. A deal with Google was also signed recently to include tweets in Google search results. We expect these partnerships will meaningfully impact data licensing revenues in the coming quarters.
Certain Direct Response Ad Products Showed Lower-Than-Expected Monetization
During Q1 2015, Twitter's ad revenue growth was impacted by lower-than-expected monetization on some of the newer direct response ad products. Specifically, an increase in ad pricing restricted the demand for advertising. Additionally, Twitter improved the quality of ads, which led to lower click-through rates and monetization. For the fourth quarter of 2015, the company gave a weak guidance based on continued challenges in the advertising business.
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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