It's become increasingly apparent that Twitter (NYSE:TWTR) is in trouble. Its user base is stagnant, its management is leaving in drones and its financials, as compounded by the company's most recent release, continue to miss the mark. Twitter's current market capitalization is a little over $10.2 billion - 60% down on its 2013 IPO cap. A number of analyses have addressed each of these points individually, and in detail, so I won't labor the points here, but none have as yet put forward the real issue. That is, Twitter is essentially valueless. It shouldn't be, but it is. We will get into why in a little more detail shortly, but first, let's note some of the arguments put forward by proponents of the company and its long shareholder base.
Perhaps the foremost argument for Twitter's bright future is the vast swathes of data it holds, and - perhaps more importantly - the real-time data its platform generates. As we will discuss, these are two very different things, and their value (especially in the case of the former) is overrated.
A second argument often used to justify Twitter's multibillion-dollar market capitalization is its user base. A base of more than 300 million monthly active users is nothing to be ashamed of, and while growth is modest, any company should be able to effectively monetize such a large base of users. Twitter is failing to do so - again we will get to why shortly.
Third, is its utility as a news broadcasting platform. As stated by CEO Jack Dorsey:
Twitter is the most powerful communications tool of our time. It shows everything the world is saying … 10-15 minutes before anything else.
This is another argument we can easily debunk.
There are more of course, but these seem to be the primary theses behind an investment in Twitter as things stand - aside from the fact that optimists might regard its current price (78% cheaper than its 2013 highs) as a discount entry. We hope, however, that the debasing of the three mentioned support points will, by proxy, debase this latter fourth.
So, here goes. Data.
We will look at the data Twitter holds on its users as individuals first, as this is far more relevant to its ability to generate revenues (as things stand). This is the data Twitter uses to target its advertisements - its sales pitch to potential ad clients, if you will. Just as Alphabet's (NASDAQ:GOOG) (NASDAQ:GOOGL) Google knows what we search for, and how we spend time browsing through its Chrome browser, and what we discuss over email through its Gmail client, etc., Twitter knows which celebrities and which brands we follow. Fake profile data aside, it also knows how old we are, where we live and - in many cases - what we do for a living. Aggregate this data and any company worth its salt should be able to offer up a pretty targeted campaign for a client. Not Twitter, apparently. We know this through two primary pieces of information. The first, through a statement made by the company's head of U.S. ad sales back in February. In an interview with Digiday, Twitter's Matt Derella discussed the company's new strategy of serving advertisements to users that aren't logged into the platform. To quickly explain this, in previous incarnations, Twitter would only display advertisements to a user that was logged in. If a non registered, or non-logged in user, was browsing the Twitter feeds of other users, it would be an ad free experience.
It's reasonable to assume that Twitter should be able to serve far more effective advertisements to users that are logged in than it can to users that aren't (read: anonymous browsers). Not so. Here's what Derella said:
We can provide the same level of deliverable results that we can with logged-in users.
This means that the data Twitter holds on its users doesn't actually translate to any deliverable benefit to its advertisers. How this can be the case is anyone's guess. The most logical assumption, however, is that Twitter's advertising is equally ineffective for both logged in users and for anonymous browsers, and that the former simply aren't responding to the ads being served across the platform. The second piece of information relates to a shift of ad clients away from Twitter, and is something we'll address in the second part of this piece - the part that relates to Twitter's ability to monetize its userbase.
Let's move on now to the real time data. Back in October, I published what at the time I believed to be a well rounded analysis of Twitter. The crux of the long side of the analysis was rooted in Twitter's data feed and the usability of this data from a computing perspective. Specifically, that the hashtag, and the text-based communication, made for far easier aggregation than, say, Instagram's images or Snapchat's image/clip hybrid communications. At the time, Twitter had just closed deals with IBM (NYSE:IBM) and Bloomberg - deals that looked to mark a shift in focus toward the data side of the business that, for so long, analysts had been screaming at Twitter to take advantage of. Fast forward to the present day, however, and neither of these supposedly pivotal deals look to have progressed into anything game changing and if latest management-investor communications are to be believed, the company has once again shifted towards trying to redesign its ad offerings (vertical video load, DoubleClick integration, etc.) rather than package and sell its data. The latest news in this arena is that Twitter is targeting Japan as a data customer. There are only 35 million MAUs in Japan (about half the US equivalent figure). If the company struggles to sell its data to US businesses to the extent that advertising still accounts for the vast majority of its revenues, chances are it won't do a whole lot better in Japan. Another example, in this author's opinion, of a Hail Mary from Twitter. To put it another way, another example of the company talking big, but when it comes down to it, not being able to deliver.
Moving on, let us now address the second argument in favor of a bullish twitter thesis - the company's user base and its monetization. 310 million MAUs, as mentioned, is a good number. When compared to Facebook (NASDAQ:FB), it obviously falls considerably short, but to say that a company should be able to effectively monetize 310 million active individuals is not being too hard on Twitter. For some reason, however, it hasn't been able to. Most reading will already be aware that the company generated $595 million revenues during the first quarter of 2016. Of this number, $530 million came from advertising. Although now we are hearing that the big-ticket advertisers are shifting away from Twitter and toward fresher alternatives such as Snapchat. I alluded to this a little earlier. This isn't a surprise. Twitter has far surpassed the point where it can be considered an experimental advertising platform for the big-name brands.
It's now at the point where advertising agencies and their clients have data on the efficacy of a Twitter campaign and are able to weigh this up against reallocating their dollars toward expanding campaigns on the other established platforms or initiating experimental campaigns on platforms that are at the stage Twitter was half a decade ago. In other words, Twitter has attempted to monetize its user base and to some extent has done so. But as advertisers shift from the platform, chances are we will look back and see the current circa $600 million - or around two dollars per monthly active user - as a peak.
So, the final argument - Twitter's utility as a live news platform. Following on from Dorsey's quote above, and this time with reference not just to Twitter's fast paced, information breaking nature but also its shift into live streaming with Periscope, here's another quote (from the latest report):
As we outlined last quarter, we're focused on what Twitter does best: live. Twitter is live: live commentary, live connections, live conversations. Whether it's breaking news, entertainment, sports, or everyday topics, hearing about and watching a live event unfold is the fastest way to understand the power of Twitter. Twitter has always been the place to see what's happening now and our continued investment in live will strengthen this position. By doing so, we believe we can build the planet's best daily connected audience. A connected audience is one that watches together, and can talk with one another in real time.
To offer up some credit, this statement is partially correct. Twitter's allure (for some) is that it offers a resource through which individuals looking for access to the latest breaking information can see what's happening. There are a number of issues with this, however. First and foremost, credibility. There have been numerous studies undertaken (here are three examples, but a quick search reveals plenty more) that totally debase the credibility of Twitter users' response to any crisis or breaking news event. Yes, factual information will generally publish through Twitter before mainstream media channels publish it, but there is a reason for the delay in the latter, and the reason is credibility. With some exceptions, reputable media channels fact check, cite sources and hold accountability for what they publish. The average Twitter user does not, and this unreliability undermines Twitter as a go to news source altogether. How can a user determine what is fact and what is fiction? Further, even if individuals did go to Twitter to glean the latest information before it breaks anywhere else, the chances of Twitter being able to serve them effective advertisements in the sort of environment that requires instant and first look access to a crisis or breaking news event are minimal.
To close out this piece, and in the interest of balance, it's important to note that this is not some sort of bias-driven rant intended to discredit Twitter as an investment opportunity. The platform has its uses. This author has a penchant for horror literature - and in particular one Stephen King - and regularly checks the latter's Twitter feed to see what his latest literary or movie recommendations are. I also have an admittedly small, personal and professional following, with whom I'm able to share articles such as this via my account. Twitter broke the recent Prince passing and I happened to see it there first as I was (likely) performing one of the two already mentioned Twitter related activities. Others no doubt, will have similar experiences with the platform. Some will use it far more.
This is about ROI, however, and when all is said and done, Twitter has shown it is unable to deliver any, and any turnaround looks highly unlikely given current conditions.
As a mainstream information sharing platform, or as a forum through which individuals are able to keep tabs on the people that pique their interest, Twitter will probably be around for years to come. It's just not an investment opportunity, and it's not going to be long before even the most ardent Twitter bulls are forced to come to this realization and unload.
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.