Twitter Inc (TWTR) will report earnings today, and while its earnings per share and revenue will be closely watched, the one metric that investors seem most fixated on is its monthly active user growth. The fact is that Twitter has had a difficult time growing its MAUs over the last year, and because of that, Twitter stock has fallen 66% over the last 12 months.
This would imply that MAU growth is imperative for TWTR stock’s survival, but in reality, it is a big misunderstanding that has ultimately created significant shareholder value.
Once upon a time, before Facebook Inc (FB), there was Myspace, and it took the internet by storm with rapid user growth among youth. Then, just as quickly as it grew, Myspace fizzled away behind the blazing growth of Facebook.
What Twitter stock owners fear most is that TWTR will become the next Myspace. After all, if it happened to Myspace, then it can happen to Twitter, right?
While theoretically correct, investors must remember that there are more than 800 million users who consume Twitter each month, both logged in and logged out. That’s a lot of users, far more than the 75.9 million that Myspace had at its peak.
Furthermore, Twitter has found its niche in news and instant reactions to current events throughout the world, whether it be Hollywood gossip or reactions to the Walking Dead. In other words, Twitter is far more a part of our everyday life than Myspace ever was, even if its MAUs never grow by one more new user.
Why MAU Growth Doesn’t Matter for Twitter Stock
With that said, six months ago, TWTR seemed to lack vision. That is, until Jack Dorsey took the reins as the permanent CEO, and rejuvenated hope for Twitter stock.
First, Dorsey made the move to lay off 8% of Twitter’s workforce, after its employee count had risen significantly faster than its revenue growth over the last few years. Dorsey then made the decision to streamline Twitter’s ops, creating more accountability and responsibility among the company’s most talented personnel.
This included yet another big move, a shakeup with top level execs to bring in fresh ideas.
After making these moves, Dorsey made a big splash by winning rights to NFL Thursday Night Football. Naturally, this attracts more eyes to Twitter, especially among middle-aged men who may not be active users at Twitter right now.
And while these things all illustrate the change that has taken place at Twitter, the biggest move, and why growing MAUs are not relevant, is that Dorsey recently decided to monetize the 500 million users around the world who consume Twitter, but aren’t actually active users.
In the past, Twitter consumed itself with trying to convert those logged-out users to active users, but instead of wasting time and money doing so, Dorsey decided that monetizing those users at half the rate of actual users is more beneficial to shareholders. I agree, and what’s best is that those logged-off users can still become active users later down the road if they desire, and will therefore be monetized at a greater rate.
After making this move, the bottom line is that MAUs are no longer that important. Instead, investors should focus on how much faster Twitter stock’s revenue and profits can grow with a nimbler team and 800 million users to monetize, versus just 320 million in the past.
What About TWTR’s Earnings?
Given that this Tuesday will reflect the first earnings report following Dorsey’s move to monetize its logged-out users, I would not expect too much focus on this development during this report.
However, with analyst expectations being much lower now than they were just six months ago for 2016 and 2017, TWTR is in a perfect situation to issue strong guidance, and its Twitter stock is cheap enough to trade significantly higher.
While it is hard to know whether this increased guidance will come now or later, seeing as how there has not been much time to implement monetization practices for logged off users, I believe that any losses in Twitter stock will ultimately create shareholder value.
In other words, MAU growth may dictate TWTR stock after earnings, but long-term, beyond this quarter, it really is an irrelevant measure of present and future performance.
As of this writing, Brian Nichols was long Twitter stock.
