Twitter’s (NYSE:TWTR) shares are down by 35% from its all-time high of $74. In 2014 alone, the stock has seen a decline of roughly 27% due to profit taking and stagnation of Twitter’s user base growth. We take this opportunity to reinforce our argument that Twitter is overvalued and the fundamentals do not justify the multiples that it is trading at. The monetization has certainly improved, but the sudden halt in user base growth fuels the idea that Twitter is not for everyone. The company needs to dispel this concern and may have to adapt and change its product to suit masses. Also, a large number of shares will come out of a lock-in period in the coming months and employees are likely to cash in their stake due to Twitter’s attractive market valuation. This could push the market price down, as we saw in the case of Facebook following its IPO.
Our price estimate for Twitter stands at $29, implying a discount of about 40% to the market price.
Slowing User Base Growth
The current subscriber trends suggest that Twitter may be in for a tough time in the U.S. The company grew its monthly active user base in the country by just 1 million sequentially, and the year-over-year growth stood notably below that for its overall user base. This is likely to make investors wary of Twitter’s long-term prospects, as we estimate that the region accounts for more than half of the company’s value. This estimation is based on the expectation that Twitter can garner 106 million domestic monthly active users over the next eight to nine years. Going by the current trends, this looks difficult. The chart below shows the company’s quarterly user trends. We notice that 1 million net quarterly additions are the lowest the company had in the U.S. in the last two years.
In addition to the above, the total number of timeline views also declined for the first time in the last eight quarters. While the U.S. business saw a decline of about 5%, the figure for the international business fell by 8%. This happened despite the growth in the active user base, which suggests that the usage declined on a per user basis. That’s not really an encouraging sign and represents a sudden reversal in the growth trajectory. It remains to be seen whether this was a one-time decline or the beginning of a trend.
Ad Monetization Could Hit A Ceiling
Twitter plans to increase the size of its sales and marketing support teams and extend its self-serve advertising platform to countries other than the U.S. We believe that these efforts will help the company sell more of its ad inventory over time, which will support growth in its monetization levels in the international segment. We currently forecast Twitter’s international ad revenue per 1,000 timeline views to increase from $0.36 in 2013 to $1.59 in less than a decade. We also forecast the same figure for the U.S. to grow past $6.00 during the same time frame. However, the ad monetization level could hit a ceiling, depending on optimal ad density and pricing that Twitter eventually decides upon. This could result in a meaningful downside to our price estimate. Facebook stated during its Q3 earnings announcement that it is satisfied with the level of ad density on mobile and has no plans of increasing it further. We are currently unaware of what Twitter thinks would be the right balance between user experience and density of promoted tweets. This poses some risk due to the possibility of the ceiling being hit sooner than we think.
Additionally, the emerging markets of Latin America and Asia are likely to have lower revenue per 1,000 timeline views compared to developed markets of Europe. This could negatively impact the figure going forward if most of the growth comes from these markets. Competition from Facebook and other platforms could also diminish the growth in ad pricing, putting further pressure on monetization growth.
Disclosure: No positions