Twitter: 2016 In Review
Twitter‘s (NYSE:TWTR) stock is down about 22% in the last year and 16% year-to-date (YTD) following disappointing results in the first three quarters and an unsuccessful effort to be acquired. In the first nine months of 2016, the company’s top line grew over 20% year-over-year (y-o-y) to $1.8 billion and its net loss declined by 33% to $290 million, owing to double-digit growth in both advertising and data licensing revenue and effective expense management. However, lackluster growth in active users and subdued advertiser demand led the company to announce that it would cut 9% of its workforce (about 350 people) in an effort to cut costs and inch closer to profitability.
User Addition Struggles
Twitter’s average monthly active users (MAUs) grew just 3.3% y-o-y to 317 million in Q3 2016, but the company was enthused with growth in its daily active users (DAUs). In the quarter ending September 2016, Twitter’s DAUs increased at 7%, compared to 5% in Q2 2016 and 3% in Q1 2016.
The company’s struggle to grow its active user base has been the primary investor concern for the past several quarters, and that is unlikely to change in the near term. Twitter recently started focusing on video to attract new users through its different offerings such as Periscope, Vine and live-streaming. 
Live Streaming Deals
In a significant development this year, Twitter signed deals with several companies to live-stream events on its platform, including 120 Sports, Bloomberg TV and the Big Four major sports leagues in the U.S.- Major League Baseball, the NHL, the NBA and the NFL.
Considering the popularity of live sporting events in the U.S., live streaming games presents a huge opportunity for Twitter to improve its largely stagnant user base and attract more advertisers. However, with the company redirecting its focus from user expansion to profit generation, the appropriate metric in focus is likely to become user engagement (DAUs/MAUs) and revenue-per-user going forward. 
Free Cash Flow Improvement
On the bright side, Twitter’s free cash flow in the first nine months of the year improved dramatically y-o-y owing to higher cash flow from operating activities and lower capital expenditures. The company’s adjusted EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) also grew 46% to over $536 million in the first nine months of 2016. Adjusted EBITDA is Twitter’s EBITDA adjusted for stock-based compensation expenses (59% of adjustments), depreciation and amortization expense (34% of adjustments), interest and other expenses, provision (benefit) for income taxes and restructuring charges. 
Capital Expenditure Guidance
Twitter has been quite conservative with respect to capital expenditures this year so far, and its full year 2016 guidance suggests that such investments are likely to remain near last year’s levels of $350 million. This should help the company improve its free cash flow further in the near term.
In our model for Twitter, we estimate the company’s capital expenditures to stabilize to around 13% of revenues by the end of our forecast period. However, if this increases to 16%, there could be a potential downside of 8% to Twitter’s enterprise value. On the other hand, if the company’s capital expenditures decrease to 10% of revenues by the end of our forecast period, there could be a potential upside of 9% to our estimate for Twitter.
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