Twitter's (TWTR) shares closed at $59 a share on Friday, an increase of 6.63% and a new all time high. Since Twitter's IPO, the shares gained nearly 33% (see graph below). This values the company at $32 billion. Friday's strong gains were the result of a positive report that showed Twitter's marketing and advertisement potential. RBC analysts increased their estimates to $60 a share, up from $33 a share. However, not all data released on Friday were as positive as RBC's report. This report shows that Twitter's traffic volumes declined -41% this year compared to last year in the Netherlands. The research was conducted by GSK, an international and independent research organisation. GSK specializes in assembling data regarding consumer choices and their behavior. Every year, GSK reports the trends in smartphone and social media use.
TWTR data by YCharts
Traffic volume is important for Twitter because the company can sell more advertisements when traffic volume is high. Many calculations and valuation reports write about the growth in Monthly Active Users, also referred to as MAU's. Declining traffic volume is a major threat to Twitter's business and earnings model. Therefore, the data in the Dutch report is alarming. I presented Twitter's user accounts and average visits per week in the table below.
|User accounts in %||27%||27%||+0%|
|Average visits per week||22||13||-41%|
The data show that the number of user accounts in the Netherlands was stable at 27% this year. However, the average visits per week declined by -41% year on year. The decline in average visits per week is not compensated by an increase in the number of users. Therefore, the total visits in 2013 declined by -41% as well. Twitter investors should worry about the data in this report, despite that the Dutch MAU account for only 1 to 2% of Twitter's total MAU and Twitter has a lot of strong growth markets left.
To put Twitter's performance in the Netherlands into perspective, I compared their performance to Facebook (FB). Facebook's user accountant and average visits per week are presented in the table below. Facebook performed much better than Twitter. The number of user accounts increased by 9% year on year and the average visits per week increased by 20%. Facebook managed to increase the percentage of user accounts and the average visits per week, while Twitter's user accounts were stable and the average visits per week tumbled by nearly half. Therefore, it is fair to say that Twitter has underperformed Facebook in the Netherlands this year.
|User accounts in %||66%||72%||+9%|
|Average visits per week||20||24||+20%|
Despite the fact that the Dutch MAU account for only 1 to 2% of Twitter's total MAU, investors should worry about Twitter's ability to grow revenues at consistent high rates. The total social media traffic in the Netherlands rely on smartphones. In fact, 67% of the population in the Netherlands owns a smartphone. Twitter's revenue growth depends on their ability to generate more mobile traffic and sell mobile advertisements. Almost 70% of Twitter's revenues came from mobile advertisement sales, according to the company's third quarter earnings report.
It is alarming to see that Twitter lost so much traffic in a well developed smartphone market. This suggests that Twitter's will not be able to grow earnings at consistent high rates in developed markets like the Netherlands. Considering the modest growth prospective in several well developed markets, it remains uncertain whether Twitter will be able to deliver the anticipated growth numbers. Therefore, I question the 'long-term with high growth' scenario that many analysts and investors expect, according to Twitter's current share price and valuation
Twitter lost a part of its market share in the Netherlands this year to Facebook and other social media. This questions the company's ability to grow earnings at consistent high rates, especially in well developed smartphone markets like the Netherlands. Investors should be cautious, because the stock gained almost 33% since the IPO. As a long-term investor, I do not buy Twitter at the current level, because of the company's uncertain future scenario. If a long-term investor already own Twitter shares, they could cover their shares with put options. I am aware that the option premium is high, because of Twitter's volatility. However, put options minimize the downside risk by giving up some of the profit investors made since the IPO.