Is Twitter Turning Facebook-Ish?

| About: Twitter, Inc. (TWTR)

Summary

New algorithm change resembles Facebook more.

Stagnant user growth rate is still a problem.

Weak fundamentals not so inspiring still.

Well, that is a tricky question to answer for sure. But, what we can say for certain is, CEO Jack Dorsey is getting really active to make Twitter (NYSE:TWTR) a front-runner in the coming years.

That shows in the recent algorithm change in the Twitter feeds timeline. As far as the news goes, the new Twitter timeline will show a default "best" tweets section in a reverse chronological manner on top when a user opens Twitter after some time (FYI, TWTR decides what's best for you at the moment). Underneath this, we get to see the rest of the timeline in reverse chronological order, as always.

Twitter told TechCrunch that the opt-out rate is still in the "low single digits." Needless to say, this opt-out rate can be of great significance, and can indicate whether this new change is working well with the users or not. And to be honest, that's the only thing that matters now - a large, loyal and active user base.

From The Company's POV

Twitter's monthly active user base has been stuck at 320 million for the last two quarters. While it is not a small number to cringe at, the very fact that it has not surged over the last six months might be worrisome. Will the new algorithm be able to sort the problem out for Twitter? Time will tell.

However, it is worthy to note that this is yet another addition after Moments (interesting updates), Periscope (live video streaming), emojis and heart sign in 2015. Well, for one second, it definitely looks like Twitter is turning Facebook-ish (NASDAQ:FB) over time. And according to me, this might be what TWTR needs at the moment.

The stagnant user base is posing problems in other areas as well. eMarketer analyst Debra Williamson stated that Twitter's sluggish user growth is impacting its ad business.

While TWTR reports 153% growth in ad engagements year over year and 41% decline in cost per ad engagement in the same period, other stats don't prove that. Twitter's ad revenue growth rate tanked to 45% in 2016 from 111.2% in 2014. In comparison, Facebook's and LinkedIn's (NYSE:LNKD) ad revenue growth declined by a mere 39% and 15% in the same period respectively. This might be because of the stagnant user growth rate that Twitter is suffering from.

We have to understand that the life of a social network depends on a steady increasing number of active users. That's what attracts marketers, and that's how the ad revenue is gained. To put that in context, Facebook is already standing at a MAU of 1.6 billion and boasts over 65% market share in social network ad revenue. Unless Twitter ramps up its user growth, it will not be able to increase its social network ad revenue share from the meager 9% at present. It must be noted that TWTR's average revenue per user, as reported in Q1 FY2015, stands at $5.14, much higher than Facebook's worldwide ARPU of $3.73, last recorded in Q4 FY2105 (This is because 79 percent of Twitter accounts are from outside US).

Will the new Facebook-ish changes, especially the new algorithm, come to the rescue? We can only hope so. It must be remembered that even though FB received lots of criticism with each of its changes, starting from its website design back a long time ago, everything has panned out well for the biggest social networking site in the world. The company boasts three million active advertisers, and both ad engagements and average ad price grew in the last reported period. It might do the same for Twitter as well.

While it may reduce organic reach for marketers, it might push up the value for users, and thus induce promoters to stick to the site and invest more into advertising for better and boosted exposure. The more time a user spends on Twitter, the more they will come across sponsored ads. It will help the company bump up its average ad price in future as well.

However, there is a risk as well. According to The Verge's interview with one beta user, the new algorithm change "tears conversation apart". The beta user says that it makes it very hard to follow events and breaking news, which is a core value of Twitter. Another beta user said that with both positive and negative sides, it just "complicates things" for Twitter. However, analyst Ben Thompson thinks that this new change neutralizes one of Facebook's primary advantages over Twitter and puts TWTR at par with FB.

From The Investors' POV

The first thing that strikes me is that Twitter's EBITDA graph, standing at $24.8 million in the last quarter, is not at all inspiring. If you look at FB's EBITDA graph below, you will see that it has seen a huge spike in the recent times. One thing to note is that in all the three companies mentioned below, the EBITDA corresponds with the revenue line. It's simple. In the social networking industry, the higher the revenue, the higher the EBITDA.

With stagnant cash flow, Twitter may find itself in a crunch to indulge in any large capital expenditures or invest in any asset for the time being (Unless it borrows from somewhere of course). In the last six months, the D/E ratio has already doubled up to 0.091 from 0.045 - not a good sign to me!

Lastly, looking at the table below, the negative returns and the high current ratio show that Twitter is just not being to translate capital into profits.

Company

P/B ratio

Current Ratio

Return On Investment (%)

Operating Margin (%)

Twitter

2.53

8.66

-9.37

-20.29

Facebook

7.27

11.25

9.4

34.72

LinkedIn

3.28

3.31

-3.19

-5.05

Click to enlarge

However, things are expected to change with the EPS slightly recovering over time. And EPS matters for us, investors.

Alpha Conclusion

This might not be a great time to invest in Twitter without any solid fundamental change in its business strategy. Although people are talking about the end of the biggest micro-blogging site in the world, I still hope that things will turn for the better. My two cents to fellow investors is to wait for one or two more quarters to see how things pan out for TWTR.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: This article is entirely the personal opinion of the author and investors are advised to consult their financial adviser before taking any investment decision.