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Summary

  • We believe that the current market valuation closely reflects Twitter's fundamentals.
  • Twitter's revenue growth is being fueled by the growing online advertising market, users shifting to mobile, attractive ROI (return on investment) for investors and high engagement levels due to real-time conversations.
  • Much of Twitter's ad revenue growth is being driven by the increasing number of ad impressions.

The market's enthusiasm towards Twitter (NYSE:TWTR) has subsided in recent months, as the stock has fallen from its all-time high of $74 to where it is currently trading today. The current market valuation is much lower than the opening market price that Twitter had on the day of its IPO, but around 15% higher than its IPO price. We believe that the current market valuation closely reflects Twitter's fundamentals. The business, except for the slowdown in user base growth, isn't doing badly. Twitter's revenue growth is being fueled by growing online advertising market, users shifting to mobile, attractive ROI (return on investment) for investors and high engagement levels due to real-time conversations. Let's take a look at these trends aiding growth.

Our price estimate for Twitter stands at $28, which is a discount of less than 10% to the market.

Growth In Online And Mobile Advertising

The online advertising market is growing, and mobile is going to be the forefront of this growth in the coming years. This has traditionally been Google's (NASDAQ:GOOG) (NASDAQ:GOOGL) turf, but relatively new entrants such as Facebook (NASDAQ:FB), LinkedIn (NYSE:LNKD), and now Twitter, are set to challenge the incumbent. Consumers are spending more time than ever browsing Internet on their laptops, desktops, tablets and smartphones. Mobile shopping has seen an explosive growth as evident from the jump in eBay's mobile commerce volume in recent years. It is imperative for sellers to advertise online considering that the proportion of online retail sales in overall retail sales is increasing every year. Twitter is uniquely positioned to benefit from this trend due to its engaging nature and highly targeted advertisements.

According to the company, the global online advertising market (excluding mobile) is expected to grow from $91.1 billion in 2012 to $124.7 billion in 2017, reflecting a compounded annual growth rate of 6.5%. During the same period, the global mobile advertising market is projected to increase from $10 billion to $52.2 billion, which suggests that the proportion of mobile in the overall online advertising market will increase rapidly. This plays right into Twitter's hands, as the company earns more than 75% of its revenues from the mobile platform.

Attractive Return On Investment Drawing Advertisers To Twitter

Ninety four out of top 100 ad age advertisers marketed themselves on Twitter in 2013. These advertisers are getting attractive return on investment as they can leverage Twitter's data to effectively target their ads to the relevant audience. The benefit is not just limited to the initial targeting. Due to the 'retweet' feature and the viral nature of the platform, these ads or promoted tweets tend to get distributed to a much larger audience for no additional cost.

Twitter users follow various accounts and users that reflect their interests, thus forming what the company calls an 'interest graph'. This graph is updated real-time, thus adding more dynamism to ad targeting for advertisers. The advertisers can engage with users in relevant contexts, which results in potential sales. For instance, if there is a conversation between two users which is somewhat related to a product or service, the seller of that product or service can chime in creatively to possibly get the users' attention.

Much of Twitter's ad revenue growth is being driven by the increasing number of ad impressions. Twitter recently touted some figures around high ad engagement levels which could help it command higher pricing in future. We strongly endorse this statement. We believe that the company's integration with TV could help it generate sustainable revenue stream. The Twitter Amplify program allows content companies to distribute videos on Twitter's platform, with a short advertisement embedded. The revenues from this advertisement are shared between Twitter and the content partner. The company has built several such partnerships in the recent quarters and is increasingly becoming a part of the TV viewing experience

Disclosure: No positions

Source: A Review Of Twitter's Business As Market Converges With Our Valuation