Here’s Why We Have Reduced Our Price Estimate For Twitter To $38
We recently revised down our price estimate for Twitter‘s (NYSE:TWTR) stock significantly from $48.40 to $37.80. This follows a number of uncertainties surrounding the company’s future. First, the slow user base growth represents a key problem for the company, as acceleration in this metric is essential to ensure robust revenue growth in the coming future. Moreover, the ongoing search for its next CEO also leads to uncertainty in the market. In addition, we remain skeptical on the recent product changes being initiated by the management. This is because previous product changes have failed to propel growth. On top of this, we have concerns related to the impact of new product strategies on the engagement of power users on the platform.
See our complete analysis for Twitter
Key Reasons For Updated Price Estimate
Slow Expansion In User Base: A key reason why Twitter’s stock got battered after the second quarter earnings release is that its user base growth failed to impress investors. Twitter’s core users (excluding SMS fast followers) grew by only 2 million during the past quarter. In addition, management has guided for slower user base growth in the short term, until its efforts to reach out to the mass market begin to pay off. Twitter’s user base growth has underperformed other social networks such as Facebook, Instagram and Snapchat in the recent past, and hence this has led to valid concerns on the Wall Street.
We think this problem is not really about the value proposition of Twitter itself, but it stems more from how it is communicated to new users. While hundreds of millions of more users had signed up on the platform, many of them did not convert into active users on the platform. The key to solving this problem lies in making the platform simpler for newer users. At the same time, the platform needs to remain complex enough to fulfill the demands of its power users. This will not be an easy problem to solve.
Revenue Growth Could Slow Down If User Base Does Not Rise Sufficiently In The Future: User base growth directly ties to revenue growth for all social networks, as more users allow more ads to be served and make the platform attractive to both big and small marketers. To date, Twitter has had an abundance of ad inventory to sell on its platform (owing to very low ad load levels). Yet in the event its audience does not grow at a fast enough pace, the company could very well face constraints related to limited availability for certain ad products. This could reduce supply to an extent, limiting revenue growth on the platform.
Uncertainty Surrounding Management Changes: Another issue rattling Twitter presently concerns uncertainty surrounding the top management at the company. Officially, Twitter is still in the midst of a CEO search, with Jack Dorsey serving as the interim CEO. While there have been some recent calls to make his appointment permanent (most recently by an early investor ‘Chris Sacca’), it is doubtful that this will happen. This is because he is also leading another company, Square, which is expected to go public by the end of the year. [1]. Since Twitter’s Board requires a full time commitment from its permanent CEO, Jack Dorsey’s appointment to the role remains uncertain. In another recent news, it seems that Dick Costolo could leave the Board once the CEO search process is over. [2] We believe this uncertainty creates an unfavorable environment at the company, which really needs to attract and retain key talent to solve the complex challenges facing the company.
Past Product Changes Create Doubts About The Future: Much ado has been made in the past earnings calls about several product initiatives, such as logged-out homepages, instant timelines, highlights, etc. Yet these thrusts have been unable to drive user growth or engagement on the platform. This makes us question whether some of the new initiatives being undertaken by the company, such as Project Lightning, could lead to acceleration in user growth on the platform. We will also be looking out for the impact of these product changes on the usage of power users, as their interests could be affected by making the platform simpler for newer users.
Our 37.80 price estimate for Twitter’s stock, represents around 25% premium to the current market price.
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Notes:- With Square IPO on Tap, Jack Dorsey Needs to Pull Out of Twitter CEO Search, re/code, July 24, 2015 [↩]
- Twitter seeks new leadership as Dick Costolo plans to leave board, Fortune, August 9, 2015 [↩]