How Big Can Twitter Become?

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TWTR: Twitter logo
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Twitter

In this article, we assess the overall monetization potential of Twitter (NYSE:TWTR). The social network hosts more than 284 million active users (MAUs), coupled with over 500 million visitors who access Twitter-owned properties but do not log-in. We analyze several factors such as ad load, MAU growth and pricing to understand its potential opportunity. At a recent investor conference, Twitter’s management had estimated the overall monetization potential at $11.4 billion, with increases in both ad load and users as the major drivers for this growth.

We think that in the long-run, the company can approach its ad-load target of 5% and grow its user base to more than 500 million users. Coupled with factors such as pricing growth, increased engagement, better and more targeted ads, and monetization of logged out user base, we think Twitter’s monetization could reach $10 billion in the long-run. However, in our model we have been slightly conservative in our forecasts. We have estimated Twitter’s top-line to rise at a CAGR of 23% from around $1.4 billion in 2014 to over $7.0 billion by the end of our forecast period in 2022. In the event, the revenue rises much faster to $9.8 billion by 2022, then it would represent over 20% change in our price estimate to around $50.

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See our complete analysis for Twitter

What Are The Factors Fueling Growth in Twitter’s Advertising Revenues?

Twitter has posted stellar advertising revenue growth over the last few quarters, driven by increases in both timeline views as well as advertising revenue per timeline view. The table below illustrates the various drivers of advertising revenue growth. As can be easily noted, there has been a huge bump in ad engagements (or impressions) per timeline view over the past few quarters, driven by low ad load (the percentage of tweets that are ads) on the social network. Combined with growth in timeline views, it has led to a significant rise in the number of total ad engagements. In contrast, cost per ad engagement continues to fall, albeit its rate is declining.

Quarter Ad Revenue Growth (y-o-y) Total Ad Engagements Increase Ad Engagements Per Timeline View Cost Per Ad Engagement Rise Timeline Views Growth
Q1 2014 125% 694% 591% (72%) 15%
Q2 2014 129% 255% 210% (35%) 15%
Q3 2014 109% 152% 121% (17%) 14%

Cost per ad engagement has fallen on a year-over-basis due to many reasons. Since Twitter is making efforts to increase the low ad load levels (around 1.3%) on the platform, we think currently there is an oversupply of ad inventory. It seems that Twitter is trying to sell as many ad slots as possible. In addition, it has been focusing more on factors such as user experience and advertiser ROI in the recent past, which has had an impact on ad pricing. However, over the long run, we expect the pricing to move in the right direction with introduction of newer ad formats, better targeting and improved ROI for marketers. On a sequential basis, cost per ad engagement rose by 18% and 3% respectively in Q2 and Q3, and we expect this trend to continue in the future.

What Is The Overall Monetization Potential For Twitter

Company Estimates

At a recent investor conference, Twitter’s management pegged the total monetization opportunity at $11.4 billion. It provided a detailed breakup of this estimate by splitting it into four aspects, namely – Ad load factor, monthly active users, logged out visitors, and DAU/MAU (daily active user/monthly active user) ratio. Raising the ad load on the platform from the current low level of 1.3% to 5.0% can potentially rake in additional $5 billion (while keeping metrics such as cost per engagement and MAU count static at the Q3 2014 level). Doubling of MAU count from 284 million to 560 million can result in incremental revenue of $4.6 billion (assuming ad load at 5% and other factors constant with Q3 2014 results). In addition, the monetization potential from 500 million plus logged out visitors has been forecast at $1.3 billion (assuming ARPU of $2.50 which is almost half as compared to annualized ARPU of $5.09 in Q3 2014). Lastly, a 3% rise in the DAU/MAU ratio in the top 20 countries can bring in additional half a billion in revenue according to estimates. [1]

What Do We Think On This Potential?

We think pegging the ad load potential at 5% is justifiable for Twitter in the long-run. Facebook’s ad load has previously been measured to be around 5%, with the figure rising to approximately 10% during the last year’s holiday season (according to analysts at Cantor Fitzgerald). [2] Considering that Twitter has fewer features on the right and left parts of user timelines as compared to FB, we believe the ad load on its platform can be easily raised to higher levels without compromising on user experience. Hence, Twitter needs to significantly ramp up the demand for its advertising products to raise its advertising revenues. Twitter is rolling out new advertising products such as video-based ads, and also making efforts to improve ad targetability, and we believe these efforts will spur demand in the future.

In terms of user base, we think that Twitter’s MAU could rise to over 540 million by 2022 at a CAGR of around 9% over our forecast period. Coupled with ad load at around 5%, we believe these two factors have the potential to lead to an annualized revenue of around $10 billion in the long-run. We think that cost per ad engagement, click through rates and the number of timeline views per user could also rise in the future as the company makes more advancements on the platform.

In addition, we see up-side from the monetization potential of both the 500 million visitors who come to Twitter-owned properties but don’t login, as well as from from the over 185 billion tweet impressions that are accessed through syndication across the web quarterly.  These could be be significant in the long-run. We expect the company to slowly realize this monetization opportunity as the initial priority will be on trying to get as many logged out users as possible to sign up on the platform. Having said that, we believe the monetization opportunity from these two sources can cross $1 billion in the long-run. Twitter’s new software development platform ‘Fabric’ for app developers, which also hosts MoPub (an advertising product), is expected to help in this direction.

Twitter’s advertising revenue per user (ARPU) stood at around $2.97 and $5.09 (annualized) in 2013 and Q3 2014 respectively. In comparison, Facebook’s ARPU stood at $6.73 and $9.49 (annualized) in 2013 and Q3 2014 respectively. We expect this gap in ARPU to reduce in the future, as Facebook’s ad load is already around optimal levels, with less scope of dramatically increasing ads on its platform.

Our $39 price estimate for Twitter’s stock is marginally lower than the current market price.

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Notes:
  1. Company Filings []
  2. Facebook (FB) Ad Load Picked Up ‘Significantly’ During Holiday Period – Analyst, StreetInsider, December 23, 2013 []