Twitter Announces Change In Leadership As Challenges Continue
Coming under severe criticism in the recent past, Twitter (NYSE:TWTR) has finally decided to change its top leadership — Dick Costolo will step down from the role of C.E.O and, Jack Dorsey, Co-Founder and Chairman of the Board, will serve as interim CEO, until the board finds a permanent successor. The last few months have been troublesome for Twitter’s investors, since the company’s stock has tumbled by 20% after crossing $50 levels in April 2015. This is despite the company’s top-line growing by 74% and 111% in the latest quarterly and annual results. The company’s performance in the first quarter of 2015 came below expectations, sparking fears among market participants. In this short note, we deep dive into some of the key concerns facing the company, which need to be addressed urgently by the new management for the company to gain confidence in the market.
See our complete analysis for Twitter
Slowing User Growth: A key reason why Twitter has lost favor with Wall Street recently has been its inability to grow its monthly active audience at a rapid pace. Twitter’s user base of 302 million users is much smaller compared to Facebook’s user base of 1.4 billion users. In addition, while Instagram’s user base rose rapidly from 200 million to 300 million from March to December, last year, Twitter’s user base increased by only 33 million users during the same period. Even Snapchat is gaining users at a much faster pace than Twitter. More recently, the company guided to slower user base growth levels in April during the Q1 earnings call. It also indicated that, going forward, it will include SMS fast followers (those who sign-up and access Twitter solely through SMSes) in its total MAU count. These negative signals have also partly contributed to the recent weakness in the company’s stock price.
Failure to Innovate Quickly: A key reason why Twitter has not been able to expand its user base sharply is that it has not been able to make its value proposition clear to the new users that sign up on the platform. Hence, while hundreds of millions of more users have signed up on the Twitter platform, a large number of them have not converted into active users on the platform. Though the company has recently introduced new features such as instant timelines, logged-out homepages, and enhanced messaging features to overcome these barriers, most of these measures have come in as too little, too late (in our view).
Problems with Direct Response Ads: Twitter’s top-line in Q1 2015 came below expectations, mainly on account of problems with the newer direct response ad products (ads that prompt users to take specific action such as downloading an app or visiting a website). With the digital advertising industry quickly moving towards these newer advertising formats, these problems raise valid concerns for advertising on the micro-blogging platform. This also calls into question Twitter’s ability to target ads to users based on their interests (which is an area in which Facebook excels). Though Twitter aims to address some of these challenges by partnering with Google and TellApart (which it acquired recently), the potential for improvement remains unclear. We will continue to monitor this area in the coming quarters.
Notwithstanding these challenges, we continue to remain bullish on the company’s long-term growth prospects. This is primarily based on the growth potential of the service to reach out to hundreds of millions of more users, driven by its unique value proposition of being a real-time network. In addition, ad load levels can easily be raised on the Twitter platform provided the company is able to improve its attractiveness for marketers. Moreover, the monetization of a passive user base, that comprises of hundreds of millions of users that visit Twitter but don’t login, as well as hundreds of billions of tweet impressions that are accessed through syndication quarterly, could also add significantly to the overall revenue stream in the long run. Over time, we believe the company will develop the mechanisms to monetize these untapped sources.
Our 48.37 price estimate for Twitter’s stock represents near-30% upside to the current market price.
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