I love Twitter. I would undoubtedly confirm that I’m addicted to it. I love going over my newsfeed, seeing what all those smart people who I am following have to say. In addition, it’s also my main source of news. What makes it special is that it adepts to the way you want to use it. I always feel up-to-date and enlightened after using it. But is the twitter stock also an good investment?

As an investor, you don’t want to sleepwalk through live and miss great investment opportunities. Peter Lynch found investment ideas by paying attention to what new products his wife or daughter loved or used to buy in shopping malls. So could Twitter be such an opportunity, a good investment idea?! A short analysis of the Twitter stock.

twitter stock

I’ve been following up with what happens at and around Twitter and the Twitter stock for a while now. Until very recently, Twitter reminded me of an out of control Silicon Valley zoo: no clear vision, no strategy. Incoherent chaos. Mark Zuckerberg was famously quoted saying: “Twitter is such a mess, it’s as if they drove a clown car into a gold mine”. Elon Musk calls it a “war zone”.

First steps

Twitter was founded in 2006 and originally started as a text only service. By mentioning someone with the @-symbol you could bring people into a conversation. The next big thing was the inclusion of the hashtag and the retweet sign.

The role of digital advertising for Twitter

Today, Twitter’s main source of revenue is advertising (in 2019, 87% of its revenue came from advertising). Following YouTube, Instagram and Facebook, and battling with Snapchat or Pinterest for the 4th rank in ad placings. But if you are a big brand, you are most likely on all of them.

Twitter, however, has some advantages: it is great for engagement campaigns, connecting people with what is happening and highlight new product launches that you want people to talk about.

Unfortunately for Twitter, companies and brands canceled or postponed most product launches and campaigns earlier this year after the consequences of the novel coronavirus smashed the marketing planning of most firms. Big sport events and other public gatherings were also canceled. Another problem is the political turmoil that happens on Twitter. You don’t want your ads to be seen next to a heated tweet from Trump. Instagram in contrast is just pictures: its light and easy.

Twitter’s ad problem

The nature of Twitter is that its users are mostly using it to consume information. That makes its network weaker and its harder to push direct response advertisements. Its not a social network, its an interest network! CEO Jack Dorsey wants people to walk away and know they have learned something. Making money from ads was never the main objective.

Twitter is mostly brand advertising and almost no performance advertising. While brand advertising creates awareness of brand or products, performance advertising is still preferred by many advertisers because it only has a cost if the desired actions are made, e.g. number of clicks or purchases.

In addition, Twitters AI system was never as good as Facebook’s and the ads were not as targeted as with Facebook or Instagram. This led to more disappointing results for advertisers with traditional advertising on Twitter. As a result, they often decided to reallocated marketing resources to other digital advertising platforms.

Audience targeting and user tracking is an issue for Twitter with many fake profiles or pseudonyms. This makes it harder to understand who is using the platform and what ads they would like to see. Companies had no clear ROI associated with the traditional Twitter ad product. Twitter couldn’t tell who has seen what ad and for how long. This is important to know for marketers to possibly retarget a person with similar ad content later. Twitter just isn’t really set up to be an ad company. Google’s ad technology can target you on google search and later show you a “follow up” ad on YouTube. Twitter needs to get better with the measurement of the efficacy of an ad. That’s what marketers want to know.

twitter stock vs facebook

Google and Facebook on the other hand, offer more performance advertising to reach a targeted audience at a cheap and effective rate. Advertisers get a direct response or “performance markers”. Twitter users go through the feed much faster, so it’s harder to increase performance. Advertisers were dissatisfied with their ad placement. As a result, Twitters revenue stagnated.

With improved ad products. Twitter and the Twitter stock will do better. But there’s more…

Many opportunities for Twitter and the Twitter stock

Twitter could easily integrate shopping applications, push their already existing video product “Twitter First View” (where a video pops up when you log in or open the App), or finally launch a subscription model. The discussions aren’t new. Dorsey said at the last annual meeting that they were thinking about all this since the dawn of the company. But that it would move away from the focus on ads. But that they would remain open to experiments how the business is run and how they make money.  

In fact, a subsription or premium feeds could look like a private feed besides the open feed, or a newsletter tool, video, podcasts, or subscription products like Tweetdeck for journalists. The strategy is to keep everything they have given free but other benefits and features after subscription.

The need for a cultural change and a clear strategy

Twitter hasn’t really evaluated all the potential of more durable revenue streams that they could create besides traditional advertising. The frequency of twitter ads is also lower compared to Instagram or Facebook which have a lot of ad density. Yet Twitter is a great place for advertisers to showcase their brand or product as being on the forefront.

Twitter can do consultative services or provide other customer service tools for companies. There are many ideas but its crucial to understanding what people are talking about and get the advertisers more involved in that!

But all this needs a clear strategy, willingness and decisiveness. And that hasn’t been Twitters strength in the last few years.

Jack Dorsey – The head of Twitter

To understand why, you have to understand Jack Dorsey who is the CEO since 2015 (after an absence between 2008 and 2015). Besides Twitter, he created the widely successful mobile payment company Square. As of today, he runs both companies. Dorsey is a pure introvert. When he was a child, he had an impediment and went to a 2 year speech therapy. He never had a “real” job and was in heavy debt before founding Twitter. In interviews he claims to love creating something from scratch.

Although I didn’t have the chance to meet him in person yet, most of what I’ve heard about him, is very positive and paints the picture of an honest, humble man with high integrity.

According to former employees he empowers people and even takes the blame if something goes wrong. Its also worth mentioning that he gave 1/3 of his equity in Twitter back to the employee bonus pool. What a leader!

On the other hand however, he is described as someone who avoids decision making and conflicts according to twitter employees. To some extend you can blame Dorsey, that Twitter never accepted the tradeoff between monetization and user experience, and I do not see that to fundamentally change any time soon. It will always be more consumer focused. This view is also illustrated by the way Twitter is organized: There’s a consumer team on the one hand and a monetization team on the other hand. To come up with a new product or service, both teams need to agree and see a benefit and a path forward. That obviously doesn’t happen too often. Ideally, they would work closer together.

Much room to grow – also for the Twitter stock?

Recent signs give hope though. In March this year, activist investors Silverlake and Eliott got their foot in the door to make monetization a top priority.

So far it seems to work. Twitter has a new focus on revenue. The new strategy also points to a stronger focus on user growth, safety issues (so that brands feel comfortable to advertise) and, as mentioned, monetization.

Revenue growth can also come from acquisitions. In May, Twitter signed a deal with the startup CrossInstall which is mainly used by app developers (gaming publishers) and helps them drive user acquisition. This acquisition clearly is a signal that they’re trying to push into performance ads.

In addition, Twitter is ramping up their machine learning to quickly remove toxic content, hate and propaganda. This will help them better understand what content is on their platform and accordingly better place ads. With an important election coming up this year in the US, safety investments are important and earning trust is the most important principle. Dorsey knows that.

Now, Twitter is exploring a variety of revenue-generating initiatives to expand its existing advertising business. For the foreseeable future however, advertising will remain Twitters main source of revenue. For that, bigger is better and user growth is key.

In my opinion, Twitter has a good chance to become a fast grower in the next couple of years and the risk reward has probably never been better with its network being more valuable than it has ever been.

Twitter has the potential to become the main source for news, headlines and up to date information. COVID for example showed how important twitter is: without the media as the traditional middleman, scientists went on twitter and shared research and received peer review in real time.

Compared to Facebook, Twitter is still tiny in terms of its daily active users. Twitter “only” has 166 million DAUs vs 1.73 billion DAUs for Facebook. But user growth has been strong lately.

A better understanding of its content, enhanced ad products, possible subscription services, and more users should result in an acceleration in ad revenue and revenue in general in the future.

Many companies are willing to pay money to access data like mentions and interactions with customers. Twitter just needs to better understand their user data and create value out of it. In my opinion, the chances for that have never been better.

It remains to be seen, if Twitter can already deliver parts of that new strategy in their upcoming quarterly earnings results, or if they need more time. Personally, I have built a first position and continue to watch the Twitter stock closely.

Please take note of our Disclaimer. Moritz Walz holds a position in twitter.

Picture sources: Sara Kurfeß & Will Francis & Sharon McCutcheon & Isaac Smith – all on Unsplash

The Twitter stock – a good investment for value investors?!
No votes yet.
Please wait...

Mehr | More

Moritz Walz

Moritz Walz (26) is an enthusiastic value investor. Since he first bought shares with his pocket money after the financial crisis, he has been intensively involved with investment ideas and strategies both privately and later professionally. He is currently completing his Finance Master in Boston. He is also an active member of the Harvard Investment Club. The trained banker studied International Financial Management at HfWU Nürtingen. In the past, Moritz has worked for HSBC Global Asset Management, Investmentaktiengesellschaft für langfristige Investoren TGV, GreenWood Investors and Shareholder Value Management AG.

Leave a Reply

Your email address will not be published. Required fields are marked *