Ah, Twitter. I love the business, but I’m not crazy about the stock.
Last week, Twitter reported its first full quarter as a public company.
Recall that the social media company went public last November with pricing set at $26 (U.S.) a share, which I’d have been quite willing to pay. But unless you were important enough to be allocated a portion of the initial public offering, you had no chance of buying stock at that price. Twitter opened for trading a hair over $45 and traded at more than $70 in late December.
The stock has been dropping like a stone ever since. Twitter now trades below $40, and if you use the fully diluted share count, the company is worth about $28-billion. That may be a nice discount to the first day of trading, but it’s still a whopping 50 per cent premium to the IPO pricing – and I’m still not buying.
I love a good high-technology growth story, and I love using Twitter. The social media site is already much more useful to me for staying on top of relevant news compared to Google or Facebook. I’m convinced it will get even more useful as new features are added and the user base grows larger. As far as monetization goes, I’ve paid close attention to the advertisements that show up in my news feed and I’ve used Twitter’s in-house ad creation and promotion tools, which are excellent.
I’m convinced Twitter is a great business with a bright future. But when it comes to its stock, there are several reasons why I’d still rather own Google and Facebook.
I believe Twitter stands a good chance of becoming the dominant way people find out about the news that matters to them. When everyone was analyzing the stock ahead of the offering, it seemed to be on track to generate at least $1-billion in revenue in 2014. Three months into the year, we have official full-year revenue guidance of up to $1.25-billion, which is strong.
Mobile is what matters to Twitter. Eighty per cent of their ad revenue comes from mobile users, and the global population of smartphone and tablet users is growing much faster than the highly mature PC and laptop markets. Twitter has 198 million monthly active users on mobile devices. This compares to Facebook with just over one billion. In other words, Facebook is five times larger than Twitter.
Usually, it’s hard for very large companies to outpace smaller rivals. Despite Facebook’s massive scale advantage over Twitter, it managed to post 34-per-cent year-over-year growth in mobile users versus 31 per cent for Twitter. Both are very healthy numbers, but it tells me Twitter is still struggling somewhat with convincing more people to sign up for its service, whereas people flock to Facebook. There is meaningful risk that Facebook could continue to evolve into a business that takes opportunity away from Twitter.
What’s the potential upside for Twitter investors? Let’s say the company can grow its user base at just 15 per cent annually for the next decade to reach one billion users. I’d be shocked if Twitter couldn’t deliver $10-billion in revenue off of that user base. If they can match Facebook’s 35-per-cent net margin, then the business should generate $3.5-billion in profit, and the market capitalization could easily reach $70-billion to $100-billion. That’s about triple the current market cap.
It’s also possible that Twitter could maintain a faster user growth rate and hit a billion users in half the time. I believe this is the No. 1 priority for the company’s management team. If I thought Twitter could hit a billion users in five years instead of 10 years, I’d conclude that the stock was a no-brainer today. Even at its current $28-billion market capitalization, it could offer a threefold return in five years.
The downside risk is that they’re unable to grow their user base and may not have much staying power, which throws a wrench into any valuation based on long-term results. This is significant.
For now, I’m more comfortable owning shares in Facebook, the top social media site on the planet, and Google, the top online advertising business on the planet. If Twitter were to drop back to its IPO price, all else being equal, I’d certainly jump at the stock.
Disclosure: The author owns Facebook and Google stock, both personally and in his Strategy Lab portfolio.
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