For years, social media company Twitter (NYSE:TWTR) has struggled to turn healthy engagement on its platform into steady advertising demand and growth. Quite simply, Twitter has struggled because the best form of digital ads (visual-heavy ads) do not mesh well on Twitter’s word-heavy platform.
![Twitter (TWTR) app being shown on a phone screen held in a person's hand.](https://investorplace.com/wp-content/plugins/lazy-load/images/1x1.trans.gif)
As a result, Twitter’s stock has been the eyesore in an otherwise surging social media space.
TWTR shares are up just 10% since April 24, 2019, while Facebook (NASDAQ:FB) stock is up 50% over that same stretch, Pinterest (NYSE:PINS) stock is up 140%, and Snap (NYSE:SNAP) stock is up 260%.
But Twitter may have just solved its “money” problem.
The company’s newly announced disappearing-content feature Fleets injects much-needed, full-screen visual inventory onto the Twitter platform, which can be subsequently populated with engaging, high-conversion, visual-heavy ads.
If that happens, Twitter’s sluggish revenue growth trends could accelerate in the coming quarters, and set the stage for TWTR to break out.
Twitter & Ads Don’t Mix
Twitter’s a great platform. I use it all the time. So do a lot of my friends and colleagues. It’s an essential and very important part of the fabric of the global digital ecosystem.
Despite its global ubiquity, though, Twitter has forever struggled to turn strong engagement into sustained strong ad revenue growth.
Over the past five years (from Q3 2015 to Q3 2020), Twitter has grown revenues by just 65%, versus 180% growth at Alphabet (NASDAQ:GOOG) and 376% growth at Facebook. Those are big gaps, and they broadly imply that Twitter has a “money” problem.
Why?
Because digital ads and text-heavy platforms like Twitter don’t mix well.
Imagine you own a shoe brand. Would you want to promote your product through Twitter in a quarter-page ad that sandwiched between two word-heavy tweets? Or would you rather promote your product through a full-screen, visual Instagram Stores or YouTube ad that’s mixed in with other visually engaging posts?
The answer is obviously the latter, because a picture paints a thousand words and context matters.
The result is that platforms like Instagram Stories and YouTube are stealing ad dollars from Twitter, which has led to sluggish revenue growth for several years, and ultimately weighed on TWTR stock.
But Twitter may have finally found an answer to this fundamental problem.
Fleets Is the Answer
Twitter just announced a new disappearing-content feature called Fleets.
Fleets appear at the top of your home feed on Twitter in the same way that Instagram Stories or Facebook Stories appear on those feeds. They are disappearing, full-screen content posts that look very much like Stories content, with a visual media focus.
Fleets are a big deal for TWTR stock for two reasons:
First, they should boost engagement. It’s no secret that digital engagement is shifting rapidly toward visual content. All the trendy social media apps these days are dominated by full-screen visuals. TikTok … Instagram … Pinterest … YouTube … etc. Fleets puts Twitter on that same playing field.
Second, they should boost advertiser demand. Now that Twitter has inventory for full-screen visual content, they can launch full-screen visual ads with brands. That should attract more advertisers to the platform. Then, as those ads show high conversion rates (as they should), more and more ad dollars will come flowing into the Twitter ecosystem.
In this sense, Twitter Fleets could actually end up saving Twitter — and spark a big breakout in TWTR stock.
Twitter Stock Breakout?
From a pure valuation perspective, at 10-times trailing sales, TWTR is as cheap as it gets in the social media space today. Facebook sports a similar multiple, and Pinterest and Snap trade near 30-times sales.
Twitter’s cheap valuation has made sense for so long because of the lack of financial firepower at the business.
But that cheap valuation will start to look like a bargain if Twitter acquires more financial firepower thanks to Fleets and a potential subscriber business that could launch in 2021.
So, if Twitter’s revenue growth rates do start to accelerate meaningfully in 2021, Twitter’s stock will benefit from both multiple expansion and higher moving forward earnings estimates.
That’s a winning recipe for big gains.
Should You Buy Twitter Stock?
Twitter has been an eyesore in the red-hot social media space for so long, it’s hard to think of it differently. But that narrative could change soon thanks to Fleets and a potential new subscriber business. If so, Twitter stock could go from zero to hero.
On the date of publication, Luke Lango did not have (either directly or indirectly) any positions in the securities mentioned in this article.
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