Twitter (NYSE:TWTR) stock perked up in early August after the social-media platform’s CFO, Ned Segal, talked up the company’s potential subscription service. Segal’s statement came only weeks after CEO Jack Dorsey said on a conference call with analysts that we will likely see “some [subscription] tests this year.”
Naturally, investors should have a lot of questions when it comes to Twitter’s subscription efforts.
Among these questions are: What would such a service look like? Would people actually pay for it? And, most importantly, what does all this mean for TWTR stock?
In short, the service will likely be a content and data analytics toolkit for power users. It will probably be cheap and will likely be adopted by a limited number of people. Consequently. the service will ultimately have a minimal impact on Twitter stock.
Here’s a deeper look.
What Will Twitter’s Subscription Service Look Like?
The service will probably help prolific, or power, users create more relevant content and engage more thoughtfully with their audiences. That’s about the only subscription service which Twitter can launch that will add value without chasing away users or advertisers.
Twitter cannot realistically launch a subscription platform for regular users because consumers use Twitter for news, most of which is free today.
Sure, places like the Wall Street Journal and The New York Times charge for content. But unlike them, Twitter doesn’t create high-quality, original content. Twitter offers mass-user-generated content (UGC), and mass UGC is free across the internet. Think Facebook (NASDAQ:FB), Snap (NYSE:SNAP), TikTok, and YouTube.
So, if Twitter was to launch a subscription service which locked some of its content behind a paywall, very few people would join it. And, depending on how this paywall disrupts users’ experience, Twitterr could lose many users.
Twitter cannot launch a subscription platform for advertisers. That’s because the platform is already the lowest quality marketing vehicle in the social-media space. Consequently, it can’t afford to burden advertisers with more costs and hurdles.
If anything, Twitter needs to make its platform cheaper for advertisers. A new paid service for marketers would not be adopted by many advertisers and could cause some of them to abandon Twitter.
But a paid service for power users could help those users get more out of Twitter, without causing the company’s user base to drop. It would only add value and which could be broadly adopted.
Will People Use It?
Although Twitter should and likely will launch a paid subscription service for power users, that service won’t ever get that popular.
Adoption of such a service will be limited to power users only, and there aren’t that many power users. About 10% of Twitter’s users drive 80% of the conversation on the platform, so about 15 million to 20 million users could potentially join the service.
Assuming a 50% adoption rate, Twitter would have 10 million paid Twitter subscribers.
The price of the service would have to be low because it’s a consumer-facing subscription service, not a robust tool for companies. A price of around $10 per month seems to make sense, given the current prices of other subscription services for consumers.
With a price of $10 per month, the service could generate $1.2 billion of annual revenue for Twitter.
Twitter’s revenues last year came in at $3.5 billion.
So, while not a drop in the bucket, Twitter’s subscription revenue will also forever remain a fraction of the size of the sales of its core ad business.
What Does This Mean for TWTR Stock?
My estimates suggest that Twitter’s subscription service is already fully priced into Twitter’s shares.
After factoring $1.2 billion of subscription revenue into my estimates, I predict that Twitter will generate nearly $10 billion of revenue by 2030. Assuming its operating margins expand to 30%-plus, thanks to its likely revenue growth, I think that $10 billion of revenue will translate into earnings per share of $3.50.
Social-media stocks typically trade at a forward price-earnings ratio of around 20 times. A forward multiple of 20 and EPS of $3.50 in 2030 results in a 2029 price target for TWTR stock of $70.
Discounted back by 8.5% per year, that works out to a 2020 price target for Twitter of $34.
The price of TWTR stock today is around $38.
So my estimates show that Twitter’s shares already more than fully price in the impact of subscription services.
The Bottom Line on TWTR Stock
Twitter’s subscription services won’t ever be that lucrative, and their potential appears to already be fully priced into TWTR stoc.
Consequently, I’d let the hype about Twitter fade before buying the shares. But consider buying them on weakness if they drop below $30.
Luke Lango is a Markets Analyst for InvestorPlace. He has been professionally analyzing stocks for several years, previously working at various hedge funds and currently running his own investment fund in San Diego. A Caltech graduate, Luke has consistently been rated one of the world’s top stock pickers by various other analysts and platforms, and has developed a reputation for leveraging his technology background to identify growth stocks that deliver outstanding returns. Luke is also the founder of Fantastic, a social discovery company backed by an LA-based internet venture firm. As of this writing, he was long FB, SNAP, and NFLX.