Twitter’s Impact Doesn’t Match Its Market Cap
Twitter (TWTR) is a Serenity level holding in the Freedom Portfolio. They released fourth quarter earnings Thursday morning and the market’s reaction is a great example of why I prefer buying and holding for the long term and not worrying about short term fluctuations. Like Amazon (AMZN) recently, Twitter reported what looked to be a great quarter which beat expectations, yet dropped the next day for reasons I don’t fully understand.
Here are some of the important numbers:
- Earnings per Share: 31 cents versus 25 cents expected
- Revenue: $909 million versus $868 million expected
- Monthly Active Users: 321 million versus 321 million expected
So despite meeting or exceeding expectations across the board, Twitter was down close to double digit percentages afterwards. There was some speculation that it could be a reaction to a projected increase in spending or possibly disappointment in the daily active user numbers that they released. The reasons for a short term drop are relatively unimportant to me as long as the long term growth story remains intact, although one of my bold predictions is certainly off to a bad start.
Which brings me to the title of this article and something that has been baffling me for a long time. As of this writing, Facebook (FB) has a market cap of roughly $480 billion while Twitter’s market cap is around $23 billion, making Facebook around 20 times the size of Twitter. While there are any number of good reasons why Facebook is so much larger than Twitter (number of active users and revenue/profitability being the main ones), the difference still seems insane to me considering the impact that both companies seem to have on our society.
It doesn’t seem like a single day goes by where news either is being made or broken by Twitter. Either it’s policy being announced by the President or athletes are sniping at the media (or each other) or controversy erupting over a sitcom star’s tweets or a former New York Time’s editor’s alleged plagiarism. Just last night, I learned of the bombshell blackmail allegations between Jeff Bezos and the National Enquirer through Twitter.
I find Twitter absolutely invaluable for keeping up with breaking news and getting real time reporting and reaction and also simply reading up on the opinions of people who I respect. Wondering why the star running back isn’t on the field? Twitter often has the answer before the sideline reporters on TV. Interested in a diverse array of responses to the State of the Union address? I can check Twitter while watching and get hundreds of different takes without having to wait until the end to get a few (mostly identical) takes on TV. Interested in some instant feedback on a company’s earnings or opinions on a just announced merger? FinTwit is invaluable. I learn about breaking news on Twitter now far more often than I do in any other media, and possibly even all other media combined. I would easily give up Facebook and all of their properties before I would give up Twitter.
And that’s why it’s mind-boggling to me that Twitter has thus far been unable to take this amazingly impactful platform and transform it into a better and more profitable business. I can’t think of very many other companies that has a bigger discrepancy between how important they are and their market cap.
I’ve owned shares of Twitter for a few years now, and as you can tell from the chart below, it’s been quite a ride. The low point was probably in 2016 immediately after Twitter essentially announced that they couldn’t find somebody interested in buying the company. Part of me was relieved, because I thought Twitter had a lot of potential as a stand-alone company, but mostly I was shocked that so many other companies had taken a look and decided that they weren’t interested in what I thought was an incredibly powerful platform at what appeared to be a discount price.
In addition (and perhaps related) to management’s seeming inability to capitalize on the power of the platform to improve the business, I’ve also been worried about the lack of innovation with regards to Twitter lately. Besides a bump in character limit and cracking down harder on what they perceive as harassment and toxic behavior, how has Twitter improved lately? Despite widespread desire for it, there’s still no “edit” button. In fact, the one rumor coming out of Twitter is that instead of adding functionality, they’re considering removing some in the form of getting rid of “likes”. Not exactly earth-shattering disruption there.
The difference is even more stark when you compare the innovation at Twitter with the innovation going on at the other company that Jack Dorsey (CEO of Twitter) is the CEO at: Square (SQ). While Twitter has been essentially treading water, Square has released their new Square Terminal, their Square Cash app which allows bitcoin trading, and been working towards a banking license. That’s a breakneck pace for any company, and makes Twitter look especially bad. It makes me worry that all of Jack Dorsey’s passion and creative energy is directed at Square, with Twitter being an after thought. Maybe it’s time to consider if this CEO-of-two-companies thing isn’t a good long term solution and to look for somebody who can give Twitter the full attention it deserves?
It’s not like it should be hard to come up with interesting ideas to pursue. A few years ago Twitter seemed prime to jump into the arena of video streaming live events when it bought the rights to Thursday Night Football. It made sense to me, as Twitter oftentimes can greatly enhance the experience of live events as it provides additional commentary on what’s going on. The experiment seemed well received, but Twitter lost the rights the next year and hasn’t seemed keen to make any major pushes since then. I understand that viewing rights to the major professional sports can be pricey, but why not make a big push towards eSports where the market is more fragmented and in its earlier stages?
Similarly, I think that one of the more under-reported stories in the past year or so is the growing acceptance and growing legality of sports gambling. This also seems like a big potential opportunity for a real time communication platform like Twitter. Wouldn’t it be cool to be watching Yankees / Red Sox and be able to make a bet in the middle of the 6th inning on whether or not Chris Sale will pitch into the 8th inning? Or bet on if Klay Thompson will hit a 3 pointer in the 3rd quarter? Twitter has the capability of instantaneously connecting millions of people who might be watching the same event. Think of the possibilities with peer-to-peer prediction markets. Dealing with payments could be a challenge, but why not work together with a payment processor like Square? I hear their CEOs are close…
These are just two ideas, but there’s undoubtedly dozens if not hundreds more. It seems like now, more than ever, there’s an appetite for people communicate online about shared experiences. Twitter has done a good job of feeding that appetite so far, but there’s a lot more work to be done. I hope they’re up for it.
P.A.U.L. Score
Protected: 5
When I wrote about The P.A.U.L. System, Twitter was the example I used of a company that had a strong moat because of network effects, so it makes sense that it would excel here. Obviously no moat is completely unassailable, and Twitter could still get disrupted, but starting an entirely new social network from scratch is hard to do. Twitter has a number of wildly popular personalities active on the service that span all different sorts of interests. There’s something for anybody. Music lovers have Taylor Swift and Lady Gaga and Justin Bieber and Rihanna. Sports fans have Ronaldo and Lebron James. Donald Trump has basically turned Twitter into his own quasi-spokesperson and there are plenty of politicians on all sides that can be followed. It’s hard to envision something easily rising up to replace Twitter.
Alternatives: 3
This is an incredibly tough one to measure and really gets at the heart of why I am torn on Twitter as an investment. As I mentioned above, Twitter seems like it has so much potential and so many opportunities to branch into all sorts of different things. At the same time, it’s fairly indisputable that they’ve failed to realize much of that potential so far. For that reason, I can’t go any higher than a 3, and even that is hard to make a case for.
Understandable: 4
Once you understand that Twitter’s customers aren’t necessarily the people who use it, but the advertisers who want to market to those people, then Twitter is pretty simple to understand. They want a large user base who uses the service a lot so they can sell those eyeballs to advertisers to make money. It’s also helpful if they can get data on their users to help advertisers more accurately target their advertising. Follow the aforementioned Taylor Swift? Then you might be interested in knowing when her new album is out. This is why it makes sense that Twitter has been transitioning from monthly active users (MAUs) to daily active users (DAUs) to monetizable daily active users (mDAUs). Each change has moved them one step closer to accurately identifying how they’re doing in terms of growing an audience that they can make money off of.
Long Runway: 3
This is an area where I have reduced my expectations for Twitter some recently. Previously I looked at the number of users that Facebook had and figured that if they could get billions of users for multiple apps (Facebook, Instagram, Facebook Messenger), then clearly Twitter should be able to reach a billion users at a minimum as well.
Frankly, Twitter’s recent growth numbers don’t support that theory anymore. Maybe the platform is too complicated, or people are scared off by the reports of toxic users, or maybe people just don’t want a social network geared more towards interacting with strangers than with friends. For whatever reason, it now looks like Twitter will probably never grow to the same size as Facebook. I still think there’s a lot more room to grow, but the ceiling might be a little lower than I might’ve thought before.
Total Score: 15
An okay score, but I think one that adequately measures how torn I am about Twitter as an investment. So much potential, but so little of it realized yet. I’m still a believer, but I desperately want to see some signs of innovation or improvement out of them soon. I’m also keeping a close eye on how they deal with the careful balance between preventing abuse and harassment without trampling free speech. If they continue to struggle in these two areas, it could be a warning sign.