Why Twitter’s ‘Indirect’ Tweet Tests Shouldn’t Bother TWTR Holders

Improvement always requires a few missteps -- just look at FB

Twitter (TWTR) is making headlines again, upsetting some of its user base by changing the way it displays tweets.

TWTR twitter stock price twitterThe company has been testing a new feature that sometimes displays “indirect” tweets — tweets from accounts that users don’t follow. Essentially, whereas Twitter used to show just tweets from friends (and whatever they actively retweeted), Twitter now is testing a new display that also includes tweets from friends of your friends.

Let’s say you follow Emma Watson because you’re a person of good taste. Well, Twitter might show you tweets from Hugh Jackman — even if you don’t follow Hugh Jackman — because Emma Watson follows him.

Twitter’s just making an association between accounts you follow and the accounts that those accounts follow. After all, if you’re interested in one, you might be interested in the other … right?

The problem is, some people find the practice annoying because Twitter is otherwise a pretty controlled experience. You choose which people you follow, and your Twitter feed is supposed to be restricted to those accounts.

Of course, Twitter already broke that image when it introduced Promoted Tweets. Anyone who paid enough money could theoretically end up getting their tweets in your feed. It’s irksome for users … but the company needs to make money somehow, right?

The motivation is similar here — it’s just a little bit more convoluted.

User growth remains a long-term concern for Twitter stock. The past two quarters have shown slight improvement, sure, and Q2’s acceleration to 6.3% growth quarter-over-quarter — coupled with stellar earnings — helped give TWTR shares a small boost at the end of July.

However, that 6.3% growth is significantly down from what Twitter was doing in 2011, where QOQ growth averaged around 20%. And that broadly slowing growth has made investors worry that the social media platform is past its peak and will have a difficult time finding more users to monetize.

So if TWTR wants any chance of reversing its performance this year — Twitter stock is down more than 30% in 2014 — it needs to continue to show that it can still significantly grow its user headcount.

Why It’s a Good Thing

If you want to have a little hope that slowing user growth isn’t fatal, remember that rival Facebook (FB) went through these growing pains (successfully) already.

The social network’s first year as a publicly traded company was pretty disappointing, with FB stock falling 36% in that time. It felt the backlash when it introduced Promoted Posts. Users complained about the forced switch to the unwanted Timeline when there were still plenty of features they’d been asking for.

In short, every step Facebook took seemed to be a misstep. Analysts, seeing that user growth was grinding to a slow crawl, speculated that Facebook had lost its “cool factor.” But, as Nicholas Carlson points out, there was actually a good reason for that slowing growth — Facebook was nearly at capacity in the U.S. How much further could it possibly grow?

Soon enough, all that tinkering — and a hefty amount of money pumped into research and new workers — started to pay off. Like a digital unicorn, Facebook leaped above the naysayers, cranked up revenues and earnings, and sent FB stock to 90% returns since its IPO, leaving doubters in rainbow-sprinkled dust.

Twitter’s in a similar rut, though its situation differs a bit from Facebook’s.

If there’s one reason to doubt that TWTR stock can pull off the same kind of turnaround as FB, it’s the size of Twitter’s user base. According to Statista.com, Twitter’s user base as of June was 255 million — a mere 20% of Facebook’s current reach. (TWTR now has about 271 million.) Meanwhile, back when Facebook was struggling in 2012, it was hitting the 1 billion-user mark.

Thus, Twitter has a long way to go if it wants to reach the same scale as its competitor. Not to mention, it doesn’t have the same excuse (U.S. saturation) for lack of growth.

That’s where Twitter’s changes come in.

One way to get more people to sign up for a service is to make the experience better, but the only way to do that is through experimentation. Twitter has tested and introduced plenty of changes over the years, but for every successful change, there are probably dozens of ideas that were tested and quietly scrapped. It’s how the process works — just ask Facebook.

Twitter knows better than to alienate its stagnating user base. If an experimental change results in sufficient backlash, the company will almost certainly revert back to the way things were. If the change sticks around, it’s because Twitter didn’t hear enough to make it believe a mass exodus will follow a full roll-out.

Bottom Line

The followers-of-followers test isn’t a sign of desperation; it shows that Twitter isn’t complacent, and that should appeal to TWTR stock holders.

It might not have an immediate effect on user growth or Twitter stock, but in aggregate, those types of changes can benefit Twitter.

If they’re done correctly.

As of this writing, Adam Benjamin did not hold a position in any of the aforementioned securities, but he does follow Emma Watson on Twitter.

Article printed from InvestorPlace Media, https://investorplace.com/2014/08/twitter-stock-twtr-tests/.

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