Twitter Earnings Preview: User Base Growth May See Temporary Uptick
Twitter (NYSE:TWTR) will release its Q2 2014 earnings on July 29th and investors will be keenly watching certain metrics. These include the number of monthly active users and revenue per 1000 timeline views. Twitter’s stock has suffered this year and management will be keen to boost investor sentiment by giving some insights into the company’s future growth. We expect that the active user base growth would have picked up in the second quarter owing to FIFA World Cup 2014. This effect will trickle down to the third quarter as well, but may subside towards the end of the year. Therefore, investors should judge Twitter’s performance by filtering it for this one time event. Besides this, we expect monetization to grow, thus driving improvement in Twitter’s EBITDA margin.
See our complete analysis for Twitter
Active User Base May See Some Uptick Due To Soccer World Cup
Twitter’s stock has fallen sharply from its all time high of $74 primarily due to a slowdown in its active user base growth. The year-over-year as well as sequential growth dropped significantly in the fourth quarter of 2013. However, the situation has improved slightly since then. In Q1 2014, Twitter added 3 million monthly active users compared to a gain of 1 million in the fourth quarter of 2013. [1] Also, international active user additions went up sequentially from 8 million to 11 million. Even the number of timeline views increased both in the U.S. and international markets following a decline in the previous quarter. As far as Q2 2014 goes, we expect the number of active users to see a meaningful growth primarily due to the impact of Soccer’s World Cup.
The tournament spurred the activity on Twitter’s network and overall 652 million tweets were sent related to World Cup Football 2014. [2] World Cup started around mid June and ended around mid July, which suggests that there will be a notable impact on Twitter’s second quarter metrics. It is highly probable that the uptick in active user base growth will be temporary, and could moderate by the fourth quarter of this year. This is because roughly 50% of the impact will be reflected in the third quarter which includes July.
Expect Growth In Monetization And Margins
Twitter’s ad revenue per 1000 timeline views is one of the key metrics to watch out for. The slowdown in user base is not alarming as long as the company can improve its monetization substantially. Its ad revenue per 1000 timeline views jumped 152% internationally and 78% in the U.S. compared to the first quarter of 2013. [3] However, there was a sequential decline as expected due to seasonality. Much of this growth is being driven by the increasing number of ad impressions. Twitter touted some figures around high ad engagement levels which could help it command higher pricing in future. We strongly endorse this statement. We believe that the company’s integration with TV could help it generate a sustainable revenue stream. The Twitter Amplify program allows content companies to distribute videos on Twitter’s platform, with a short advertisement embedded. The revenues from this advertisement are shared between Twitter and the content partner. The company has built several such partnerships in the recent quarters and is increasingly becoming a part of the TV viewing experience.
There is still a sizable gap between the monetization levels of Twitter and Facebook. If Twitter manages to improve its monetization such that its average revenue per user matches that of Facebook, it will imply almost doubling its current revenue per 1,000 timeline views. We expect Facebook’s average revenue per user to be roughly 60% higher than that for Twitter by 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.
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