Twitter Inc (NYSE:TWTR) has been the talk of the market ever since its initial public offering. Yet from the get-go, I never believed TWTR stock would amount to much. That said, I didn’t think Facebook Inc (NASDAQ:FB) would make any money either, so what do I know?
Facebook has since become a bona fide advertising juggernaut for display advertising. It’s doubtful that any other service will usurp Facebook’s position atop the social media landscape. It is possible, sure, as we saw with MySpace, but FB seems to have infested the global online social structure. And the advertisers have lined up in spades.
No, it was Twitter that would go in the direction I expected of Facebook. That is, toward a money-stagnating platform that just doesn’t have the model that reels in advertisers. There remains tremendous skepticism about the value of TWTR stock, based on advertising revenue that is growing, but is also slowing.
What Will Save TWTR Stock
Revenue has been growing for TWTR stock — from $1.4 billion in FY14 to $2.22 billion in FY15 to $2.53 billion in FY16. That has led to growing gross profit for those years — $957 million, $1.49 billion and $1.6 billion, respectively.
However, cost of revenue, R&D and SG&A expense for TWTR stock have also been increasing. This has led to declining gross margins (68.2% to 63.1%). Still, operating losses have been improving slowly, from $539 million in losses in FY14 to $367 million in losses in FY16.
On the bottom line for TWTR stock, net loss improved from $578 million to $457 million. However, since free cash flow was significant, even backing out stock-based compensation, and TWTR stock is backed with $3.73 billion in cash and short-term investments, Twitter has time to evolve.
So along comes the idea of a subscription service for Tweetdeck. For $20 per month, the idea is that the service will offer things like content management, advanced trend analysis, ability to manage multiple accounts, advanced publishing features, other analysis tools, access to pre-populated lists and many other things.
This might create a significant revenue stream for those that use Twitter as an advertising platform in some way. Anything that makes TWTR easier to use, and has value-added functionality that converts to higher ROI will be of use to that demographic. It will be of little use to regular users, however.
See, the thing about Facebook is that it has effectively become the Starbucks Corporation (NASDAQ:SBUX) of the internet: a place to meet between work and home (or while at work and home). So it is becoming indispensable.
Twitter is really more of a lark for many people. They can live without it. That’s the ultimate challenge for TWTR stock. Twitter needs to make itself indispensable, and if the company hasn’t figured out how to do that yet, it’s not going to. Unless it hires someone who truly has a vision.
Now, it can survive even if it doesn’t. Those are the viewers that are consuming the ads. If Twitter is a lark, but continues to occupy a place in social media of any stature, there’s money to be made.
What does this mean for Twitter stock? It trades at about four times revenues ($10 billion). Twitter’s current user base from its fourth-quarter report is 319 million monthly active users. Let’s say that just 3% of this base goes for a $20 monthly subscription service.
That would result in $2.3 billion of recurring revenue, or double the current revenue. Might that lead to a $20 billion valuation? Perhaps … if Twitter executes.
With the stock at $14 and change, it may be worth nibbling before it reports earnings Wednesday (with a stop loss of 7% to 10%).
Lawrence Meyers is the CEO of PDL Capital, and manager of the forthcoming Liberty Portfolio stock newsletter. As of this writing, has no position in any stock mentioned. He has 22 years’ experience in the stock market, and has written more than 1,600 articles on investing. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.
