Twitter Inc (TWTR) stock crashed this week after Jack Dorsey’s first quarter as the permanent CEO failed to impress. While Twitter earnings beat expectations, revenue guidance for the fourth quarter implies growth under 48% — well under the near 55% that analysts expect.
The issue of user growth also came into question, with its monthly active users rising just 1% quarter-over-quarter to 320 million.
Therefore, investors are justified in asking the question: How long TWTR can maintain explosive revenue growth when its user base is not growing?
Its a valid question, one that Dorsey spent much time discussing on the conference call.
And the answer might be good for Twitter stock holders.
Twitter’s User Base Is Much Larger Than It Appears
Twitter now has 320 million monthly active users and 307 million excluding SMS Fast Followers. While the numbers sound big, it’s important to note that they’re also stagnant — active users haven’t changed by much, or at least by as much as investors would hope.
However, for the past year, Twitter execs have tried to drive the notion of logged-out users creating growth to investors. These are people who use Twitter in some form without actually having an account, or being logged in.
Dorsey figures this logged out audience to be over 500 million users monthly, meaning TWTR’s total user base in theory actually exceeds 800 million. Twitter also notes there are more than 1 billion unique visits monthly to websites with embedded tweets.
The bottom line is that there are far more people consuming Twitter than its monthly active users reflect.
Why Non-Network Numbers Matter for TWTR
With that said, if TWTR can find a way to monetize those logged off users, concerns of slowed revenue and user growth should fade, and Twitter stock naturally should go higher.
During the third quarter, TWTR’s advertising revenue not earned on its network, a reflection of logged-off users, reached $66 million. While still small relative to total revenue (13% of total ad revenue), it represents a big increase sequentially (8% of total ad revenue in Q2) and year-over-year (2% of total ad revenue in Q2 2014).
Therefore, much of TWTR’s growth is coming from off-network ad revenue, and this is a trend that should continue due to the size of its logged-out audience — users who also see ads.
Specifically, advertisers can now expand their campaign to both Twitter-owned and non-operated audiences, which means that TWTR is monetizing that 800 million logged-in and logged-out user base nicely.
Addressing the Obvious Problems With Twitter Stock
All things considered, the reason that Twitter stock fell so abruptly in response to earnings is because there are growth concerns. Investors are worried that Twitter can’t grow its monthly active users, and that revenue growth will soon hit a wall.
With 800 million total users, however, the monetization opportunity is much more robust. And with Jack Dorsey focusing his energy on making Twitter more consumer-friendly, and implementing major cost cuts to streamline the business, Twitter earnings reaction might just be a good investment opportunity.
Furthermore, one area to be optimistic about that was also heavily discussed on the conference call was the new Moments feed on Twitter. Moments has been live for just three weeks, but is one way that TWTR is presenting information to users that is most important, from accounts that are most followed and tweets that are most popular.
It puts Twitter’s best foot forward; the company’s first attempt at a reverse chronological timeline that gives users meaningful and organized stories to follow.
Last year, a Deutsche Bank study found that 80% of ex-Twitter users cited the need for better sorting and filtering tools with less clutter as the No. 1 reason for leaving Twitter. Moments addresses this concern and will likely help TWTR convert many of those logged-out users to logged-in, while also keeping users on Twitter.
When combined with Dorsey’s recent actions, and the company’s large user base, I suspect that Twitter stock will end up being a great long-term investment opportunity following the negative reaction to earnings.
As of this writing, Brian Nichols was considering entering a position in TWTR within the next 72 hours.
