What’s Next For Twitter?
Twitter‘s (NYSE:TWTR) stock has been on a roller coaster ride over the past month, mirroring the rumored acquisition interest from several major players, including Salesforce (NYSE:CRM), Disney (NYSE:DIS) and Alphabet (NASDAQ:GOOG). The company’s stock price rose about 40% in the last week of September to peak at around $25 (for a market cap of $17.6 billion) but has since tumbled to under $17 (for a market cap of $11.4 billion) as potential buyers withdrew their interest.
With the possibility of an immediate acquisition behind us, Twitter’s problems are back in focus. Twitter’s struggle to grow its active user base has been the primary investor concern for the past five quarters and its present management (led by Jack Dorsey) has not been able to assuage these concerns. Twitter’s average monthly active users (MAUs) grew just 3% year over year and 1% quarter over quarter to 313 million in Q2 2016. This lack of user growth has continued for so long because the company has neither been able to adequately define its purpose and identity nor make its platform easy to understand. In addition, Twitter has failed to adequately check abuse by trolls, driving many users to permanently leave the platform.
Can Twitter Live-Stream Its Way To Glory?
Twitter, which originally started out as a micro-blogging site, eventually evolved into a social platform for discussing views, news and live events. It is currently listed as a news app in both the App Store and Google Play Store, but video ads through streaming of live events are widely expected to be the primary source of revenue going forward.
Twitter has successfully live streamed the first five Thursday Night Football (TNF) games to date as part of its $10 million deal with the National Football League (NFL) to stream all ten TNF games this season. The response from fans and commentators has been extremely positive with respect to the live sports streaming experience, which combined the worlds of live sports and real-time fan chatter. The company also has deals with several other companies to live-stream events on its platform, including 120 Sports, Bloomberg TV and the other major sports leagues in the U.S. Thus filling out the roster are Major League Baseball (MLB), the National Hockey League (NHL) and the National Basketball Association (NBA).
Twitter recently also entered the fray to broadcast Indian Premier League (IPL) cricket games, where it will likely compete with several heavyweights including Facebook, Amazon and Reliance Jio for the tournament’s digital media rights. [1] Twitter’s head of sports partnerships, Aneesh Madani, recently stated that nine out of ten Twitter users in India are cricket fans and that there were about 10.6 million IPL related tweets this season, implying a growth of 56% over 2015. [2] This highlights the potential viewership and engagement of such games on the Twitter platform and could help Twitter expand its reach in the Indian subcontinent. The results of the bidding process will be out October 25. We will keep track of the developments.
Stock-Based Compensation: How Big Is This Cost?
Twitter has not been able to turn a profit in its history and one of the primary reasons for the same has been its extraordinarily high stock-based compensation expenses. Its quite normal for tech companies to partially compensate their employees in the form of stock options both to save precious cash and incentivize loyalty by clubbing a part of their compensation with the company’s fortunes. However, such compensation expenses gradually decline as a share of revenues as the company grows and matures. This hasn’t happened for Twitter as swiftly as shareholders would have liked. 
In fact, Twitter ranks second among the larger tech companies (annual revenue > $1 billion) in terms of stock-based compensation expenses, which were equal to about 26% of the company’s total revenue in the first half of 2016. [3] For perspective, Facebook’s stock-based compensation expenses are currently about 16% of its revenues and Salesforce’s are about 9%.
Now that its not getting acquired (for now, at least), Twitter should seriously think about managing its stock-based compensation expenses and try to turn an operating profit. Its actually surprising that even with such high employee expenses, Twitter hasn’t been able to innovate its way out of its current mess. Even apparently solvable issues — such as an intuitive user feed, follower recommendations, photo/video filters and checking abuse — have only partially been resolved and much needs to be done. Shareholder confidence is possibly already at its lowest at the moment and the combination of slow user growth and continued losses will not be acceptable for long. Twitter needs to define its position better in the market and execute faster to bring back shareholder confidence and improve employee morale. Handing out higher stock compensations will not be enough to retain employees if the management lacks vision and the urge to execute.
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Notes:- Twitter joins race for IPL digital rights, Economic Times, Oct 17 2016 [↩]
- Facebook joins Reliance Jio, Amazon in weighing IPL digital rights bid, Livemint, Oct 18 2016 [↩]
- Why Twitter Is Actually a Media Company, WSJ, Oct 16 2016 [↩]