I have been sizing up a position in Twitter Inc (NYSE:TWTR) for a while now. Earlier this month, I got my chance and pounced on the opportunity. I’ll be the first to admit, I’m not 100% sold on TWTR stock as an investment. It’s far from my largest position and it is certainly a speculative holding.
User growth is the biggest issue for Twitter at the moment. Last quarter, Twitter beat on earnings-per-share and revenue expectations, although sales fell 4.6% year-over-year.
That’s a big no-no for a social media stock.
TWTR User Growth
On a year-over-year basis, Twitter grew monthly active users and daily active users 5% and 12%, respectively. However, on a quarter-over-quarter basis, Twitter remains unimpressive. TWTR saw monthly active user growth remain flat at 328 million users, while actually experiencing a decline from 70 million to 68 million users in the U.S.
Flattening growth is bad, but declining growth is worse. However, the company continues to invest in its fastest-growing segment: Video. While it may have lost the 10 Thursday Night NFL football games it streamed in 2016 to Amazon.com, Inc. (NASDAQ:AMZN), it has more going for it too.
In 2017, TWTR will focus on the “value-add” portion of the NFL. That is, streaming pre- and post-game coverage and providing interviews and recaps. That could have a broader reach than just Thursday night broadcasts that are aired alongside CBS Corporation (NYSE:CBS) and NBC, which is owned by Comcast Corporation (NASDAQ:CMCSA).
From CFO Anthony Noto:
“[We are] delivering more value to advertisers than ever, with double-digit growth in daily active usage, improvements in ad relevance and better pricing…We’re proud of our strong growth in video, which remained our largest and fastest growing ad format, and we received a positive response from advertisers around the live premium video content.”
In other words? TWTR is putting its eggs in the video basket. The hope is that this boosts user engagement and revenue dollars from advertisers. It’s a longer-term strategy that could pay off big time, but one that’s unlikely to pay many dividends in the interim.
What Is Twitter, Anyway?
Twitter is such a tough asset, truly. Last fall when the company was apparently for sale, no buyers ultimately came through. Facebook Inc (NASDAQ:FB) CEO Mark Zuckerberg once said Twitter management is sitting on a gold mine, albeit while driving a clown car. The hope here is that CEO Jack Dorsey can mine that gold. The biggest fear though, is that Twitter has missed its chance.
On the surface, Twitter is the real-time search engine. Yes, Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL) is the king of search with its Google platform. But when news outlets, celebrities or politicians are looking to break news, they do it on Twitter. That’s also why people look to find breaking news on TWTR before Google.
It’s an interactive news center and a search platform more than a social media company. Perhaps it will be a video destination in the future. My speculative wonder makes me think perhaps Walt Disney Co (NYSE:DIS) will partner or maybe even flat out acquire Twitter in the future. After pulling out of its streaming content plans with Netflix, Inc. (NASDAQ:NFLX), Disney has shown it plans to go another route with streaming on its own. Incidentally, Dorsey also sits on the Disney board.
A partnership and possibly an eventual tie-up between Twitter and Disney makes a lot of sense, given all of Disney’s live content and especially its ESPN coverage. Twitter lives on live content — especially sports — and is working tirelessly on video. Perhaps Disney will find that progress attractive in the future. Even just a partnership with Disney would be highly valuable to TWTR.
Valuing TWTR Stock
All of this makes TWTR stock very hard to value. It’s a go-to news destination, but lacks users growth and isn’t really that profitable (although, at least it’s making money). As it stands though, it seems like TWTR stock is worth more than $12 billion. How much more is the real question.
The $15.75 to $16.50 area seems like a fair level to buy TWTR stock. Its ultimate lows hover near $14 and that would obviously be an attractive level to buy at again. But as it stands, current levels aren’t a bad spot to start.
There’s value in Twitter, it’s just not a given on how management will unlock it. I’m not sure myself. But it’s a valuable platform and TWTR stock is cheap. FB is the clear winner in the social media space, but if TWTR is able to transform itself from a social media play into a content distribution play, it’s worth a lot more than it is today.