About 10% Upside If Twitter Fills The Monetization Gap Between Itself And Facebook

Twitter (NYSE:TWTR) is doing well in terms of growing its monetization, thanks to impressive ROI (return on investment) that advertisers are getting on its platform. In the U.S., the average revenue per 1,000 timeline views increased from roughly $0.32 in 2010 to $2.68 in 2013, as the company’s advertising business picked up. Twitter has been investing significantly in marketing, and has already developed rapport with major brands and advertisers. For its international business, the figure jumped from $0.02 in 2010 to $0.36 in 2013. We expect these metrics to continue to grow taking help from better targeting, Twitter Cards and the Twitter Amplify program. Twitter’s platform partners use Twitter Cards to embed images, videos and other interactive media experience into their tweets, thus creating a much more rich and engaging experience. The Twitter Amplify program allows content companies to distribute videos on Twitter’s platform with a short advertisement embedded. Revenues from this advertisement are shared between Twitter and the content partner. However, when compared to Facebook, Twitter still lags significantly in terms of monetization efficiency. If it can match Facebook, our price estimate can go up by 10%. Below we discuss the math behind this conclusion.

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40% Upside If Twitter’s Monetization Efficiency (Per User) Catches That Of Facebook

Globally, Twitter’s annual number of timeline views per user stood at 2,653 in 2013, whereas its annual revenue per 1,000 timeline views edged past $1.00. For Facebook, we estimate that the total number of page views per user was more than 14,000 and revenue per 1,000 page views stood at 42 cents during the same year. Before we compare the two, we need to understand the basic difference between their platforms. A timeline view on Twitter holds much more importance than a page view on Facebook for advertisers due to higher engagement and very specific content. Therefore, a fair comparison between Twitter and Facebook can only be done after normalization. We notice that Facebook’s page views per user are 5.33 times the number of Twitter’s timeline views per user, whereas Twitter’s revenue per 1,000 timeline views is only 2.38 times the revenue per 1,000 page views for Facebook. In other words, given that a timeline view holds much more importance for advertisers, Twitter should be able to monetize it much better.

What if Twitter manages to improve its monetization such that its average revenue per user matches that of Facebook. This will imply almost doubling its current revenue per 1,000 timeline views. However, we are more interested in the situation few years down the line in order to judge the valuation impact. We expect Facebook’s average revenue per user to be roughly 60% higher than that for Twitter by the end of our forecast period (2020). If Twitter matches Facebook’s figure, there can be a massive 40% upside to our price estimate. This can be achieved only if Twitter manages to grow its U.S. monetization four-fold and its international monetization eight-fold. In other words, the company will need to do exceptional work if it has to catch up with Facebook in terms of monetization efficiency (per user).

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