Twitter: Elliott To The Rescue

Summary

• Elliott Management is pushing for the ousting of Twitter CEO Jack Dorsey.
• Jack has done an exceptional job of returning Twitter to substantial user growth.
• Twitter has failed to take any reasonable monetization path beyond digital ads on Twitter.
• The company could have a clear path to $10 billion in annual revenues by adding subscription services and monetizing Periscope or even Vine.
• Looking for a portfolio of ideas like this one? Members of DIY Value Investing get exclusive access to our model portfolio. Get started today »

According to news reports, Elliott Management has built a $1 billion stake in Twitter (TWTR) and plans to push for ouster of CEO Jack Dorsey. The move is definitely controversial as the social media site has made an enormous turnaround under his leadership, but the company has also failed to capitalize on tons of promising assets. My investment thesis remains highly bullish on the stock based on the accelerating user growth and cheap valuation.

Image Source: Vine website

Jack Dorsey Legacy

Jack Dorsey took over the interim CEO role from Dick Costolo on July 1, 2015. By October, he had become the full-time CEO. He was already the CEO of Square (SQ) and has maintained these dual roles for going on five years now.

His latest push to move to Africa for up to six months has a lot of detractors pushing for his ouster. The primary issue has been a string of revenue issues during his tenure, while Jack has done an exceptional job turning around user growth.

In the latest quarter, Twitter saw monetizable daily active users (mDAUs) jumping 21% to 152 million. During 2015, the number had stalled at 93 million. In the four years ending Q4, mDAUs were up 63%.

Despite facing a clear user issue back in 2015, the company still had revenues growing by over 50%. As users actually flatlined in the year, Twitter lost momentum, and revenues actually fell in early 2017.

Source: Seeking Alpha earnings

Prior to his arrival, Twitter hired Anthony Noto from Goldman Sachs as the CFO. His connections to Wall Street and the NFL paid off, with the social media site acquiring the rights to air Thursday Night Football games for the 2016 season in a move that turned around the prospects of the company.

Eventually, Noto became the de-facto leader of the company until his departure in early 2018. His legacy left Twitter in the position to return to 20% revenue growth in 2018.

Unfortunately, the company hasn't maintained any momentum since his departure. Mr. Dorsey has done an exceptional job turning around the performance of the social media site leading to the 21% mDAU growth in the latest quarter, but the company is no longer leveraging up the additional users for faster revenue growth.

The company has done nothing to improve the ARPU in the time period of Jack running Twitter. The ARPU is actually down $1 per user since Q4'15, while Facebook (FB) has nearly double the revenue per user with over 10x the users at 1.6 billion:

• Q4'15 - $7.64
• Q4'19 - $6.64
• Facebook Q4'19 - $12.71

The end result is Elliott pushing for a new CEO to lead the company. Twitter has failed to innovate on the revenue monetization side, and clearly, a new executive in charge could quickly change this dynamic via a couple of routes besides digital ad revenue growth on the Twitter site: subscriptions and Periscope or Vine.

Subscription Fees

Exactly three years ago, several informal Twitter surveys by influential users highlighted a strong willingness for power users to pay monthly fees for premium services. In fact, the case was made in my previous research for at least $4.5 billion in annual subscription fees.

A key aspect was ~40% of users willing to pay a monthly subscription fee of at least $1, and the MAU base was only 305 million. The amount reached 330 million before Twitter quit reporting this figure in favor of the mDAU.

Since 2017, the mDAU number is up 38% from the 109 million reported in Q1'17 to the recent 152 million in Q4'19. Using this user increase, one can simply multiply the $4.5 billion revenue estimate to reach $6.2 billion.

The big question is why Twitter hasn't made any moves to build a subscription stream. The current revenue target for 2020 is only $4 billion. The revenues are based almost entirely on ad revenue where the social media site has to compete with the internet giants to acquire advertising customers.

On the flip side, Twitter apparently tested an idea of a $19.99 per month service. So, it isn't as if management wasn't listening back in early 2017, but the target price was way off base.

Users were willing to spend between $1 and $10 per month, not nearly $20. The successful video streamers, whether Netflix (NFLX) originally or Apple (AAPL) and Disney (DIS) recently, all learned that lower prices was better to acquire customers at the start.

Beyond Twitter

If the lack of progress on subscription services is perplexing, then the company's failure on monetizing either Periscope or Vine is a head-scratcher. Twitter now has a second successful secondary app the company is allowing to die on the vine.

In a world where top content creators can monetize content via video streaming services, YouTube and even podcasts, Periscope is completely missing out on building out a service to deliver ads to streaming shows. The video streaming service could easily take podcasts to the next level via streaming video versions with preroll and mid-roll ads for verified accounts.

In a similar manner, Vine died because those sites rely heavily on power users creating content directly for the site to survive. Twitter thrives by providing a source of news and information where power users can drive people to their own websites to consume the most valuable portions. Periscope and Vine both need monetization engines to drive content creators to stay active.

In a lot of ways, Vine was the original TikTok. TikTok is now very popular in allowing users to create short form videos similar to how Vine was focused on entertaining six-second videos.

In 2016, Twitter decided to shut down Vine. The service had over 200 million users back in 2015.

Now ByteDance (BDNCE), owner of TikTok, is the reported second-largest digital ad player in the Chinese market with over $7 billion in 1H'19 revenues. The site is even seeing a huge surge in in-app purchases where one could've viewed Vine being successful.

Whether or not Twitter can revive Vine, the company still has a clear opportunity in Periscope. According to Interactive Advertising Bureau, the podcast advertising market will top $1 billion in ad revenue by 2021. Periscope should be angling for a more compelling video version of podcasts that are generally audio only.

Source: Interactive Advertising Bureau

Every radio show could instantly stream on Periscope as a streaming video version viewable all around the world. The video versions should generate far more ad revenues, but the company has made zero progress in monetizing the site.

Takeaway

The key investor takeaway is that Jack Dorsey has done an incredible job turning around the Twitter site. The social media site is now a powerhouse in the space with no real competition in breaking news leading to a growing user base.

As a CEO, Jack has failed miserably to monetize the website and move the revenue base beyond just digital ad revenues on Twitter. The company has failed to implement promising subscription services for Twitter and make both Periscope and Vine into viable monetization engines despite other similar industry success stories in recent years.

Whether Elliott is successful in ousting Jack as the CEO, the key story is making changes at Twitter to aggressively push further into monetizing all assets. The stock would have a far higher value with sustainable revenue from subscription revenues and other sites generating revenues.

One can make the case for $10 billion in annual revenues in the future and a stock trading far closer to $75 based on Twitter maintaining a P/S multiple of 6x.

• Twitter digital ads - $4.5 billion
• Twitter subscriptions - $4.5 billion
• Periscope/Vine - $1.0 billion.

Analyst’s Disclosure: I am/we are long TWTR. 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.

The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock you should do your own research and reach your own conclusion or consult a financial advisor. Investing includes risks, including loss of principal.

Comments

[Stone Fox Capital]

No surprise here.

-Twitter (NYSE:TWTR) has withdrawn guidance as it faces down impact from the COVID-19 pandemic.

-The company has pulled its revenue and operating income outlook for Q1, along with its full-year forecast for expenses, stock-based compensation, headcount and capital expenditures.

-Conversation about the virus along with product improvements are driving strength in monetizable daily active users, though, with quarter-to-date mDAU up 23% to 164M.

[Stone Fox Capital]

Cleaning up the platform was a must, but always felt Dorsey was taking it to far politically. He lost a lot of credibility when celebs could wish death on the President and it wasn't cleaned up for the health of the platform. Not to mention, what business would allow attacks on their #1 customer? lol

-The effort by CEO Jack Dorsey to clean up a toxic environment on Twitter (NYSE:TWTR) has stalled, the WSJ says, and it could be complicated by new activist pressures.

[Stone Fox Capital]

Dorsey having 2nd thoughts on Africa... like the angle of promoting the use of Twitter to Africa, but that still doesn't like his point.

-Speaking to Morgan Stanley's TMT conference, the CEO of Twitter (TWTR -3.7%) and Square (SQ -2.6%) says "When I tweeted about my intention to spend a few months in Africa this year, I made a mistake and should have provided more context about why."

[JP24]

Stone - Here’s part of a post I made on another thread back on March 2:

“...On the other hand, a CEO shouldn’t casually be implying that he might just ‘move to Africa’ for a portion of the year without offering some detail as to why. I like what Dorsey has done, but things like that border on being irresponsible and just make for fodder that can easily be blown way out of proportion. There’s a balance and Dorsey needs to find it.”

Today, he’s doing exactly that by ‘providing more context’. Maybe he is working to find more balance between being who he is and being the CEO of a multi-billion dollar enterprise. It’s a process. But I’m glad he stepped up to it.

[mannybon]

WTF

[mannybon]

He makes to many mistakes let see 2019 his account and many others hacked including the NFL and some well known actors. Then of course the ad software screw up with no accountability and now you say you made a mistake and should have provided more context about why you are moving to Africa that is bullshit. You just bought another company with 4 to 7 former FB engineers and you never made public to Twitters share holders the cost. You already have over 400 engineers at Twitter that can't come up with Jack shit so you go out and buy a company just to get there engineers in the hope's they have a brain. Twitter didn't come up with this new fleets tweet disappearing after 24 hrs the company you just bought with the former FB engineers did WTF!! This tells me you have a lot of dead weight at Twitter including yourself Jack.

[A_Fava]

So you claim their leadership is exceptional despite trading sideways the last 5 years and giving up on Vine, under Dorsey, which had over 100 million users. He's still an anchor on the business despite slight improvements in certain metrics.

[Stone Fox Capital]

@A_Fava
wait, how did you come to that conclusion? Said they did an exceptional job turning around the user base, but this article has a title of "Elliott to the Rescue". Good leadership doesn't need a rescue.

[Stone Fox Capital]

Interesting to see if fleets work. Personally don't use Twitter for stuff to disappear, but maybe this will bring in new users.

-The fleets differ from tweets in that they'll disappear after 24 hours; can't receive likes, replies or retweets; and otherwise won't be circulated through the network, or show up in Search or Moments.

[JP24]

May help bring in new users who are concerned about their posts ‘living forever’. But it better not replace tweets. Sharing Twitter links outside of Twitter is something my friends and associates and I do amongst ourselves regularly. Each time someone receives one, it typically draws them into Twitter. If that capability disappeared, I can see my own use declining for sure.

[Boraxis]

@JP24

Yes, there's many news outlets that quote twits. That's why I think they don't want edit button. Suppose Trump twits some nonsense. All news venues will link that twit. Then, if he edits the twit and changes the content, the news story is invalidated. I think that's the DNA of news: it's always live and you can't take it back.

[JP24]

Boraxis - This is obviously different from an edit capability. Many users (like Trump for example) WANT their comments posted everywhere. Others don’t and adding this option seems to be intended to draw those people into Twitter. I doubt it’s a game changer one way or the other. But it’s an interesting idea to test at least.

[mannybon]

Twitter is loosing so much during this election because Jack Dorsey is so bias, If I were the CEO at Twitter I would have had a Town Hall type of conversation live on Twitter at lease once a week with each candidate so everyone can Tweet questions and comment on the answers. Just think of the engagement this would bring to Twitter. Twitter is suppose to be about the conversation so lets have one.

[JP24]

Come on. Twitter is no place to have a ‘conversation’. It’s a place you look to in order to follow developing news. The elections will produce plenty of traffic on Twitter. Already have.

Town Hall meetings become out of hand and unmanageable shouting events when you have 50 people in the room. Can you imagine what would happen if you tried to have one on a platform like Twitter? OMG...No thanks...Bad idea...

[mannybon]

Jack Dorsey is the one who said Twitter is all about the conversation.

[mannybon]

Come on you cant shout on Twitter!!

[JP24]

Stone - Everybody wants to give Noto credit for turning Twitter around and he certainly deserves some of that credit. But let’s not forget that Noto was one of only a very few senior managers that Dorsey retained when he went about draining the swamp. Dorsey deserves credit for good judgement. Additionally, Noto left for a CEO role and not because he was pushed out or because he was unhappy with Twitter or Dorsey as far as I know. Hell, he probably came to Twitter because he thought he’d succeed Costolo at CEO and knew that when Dorsey came back that door had closed for a while at least. Good for him.

[imeldo marcos]

jack didn't do sh*t. trump and elon did all the work .

[JP24]

If Trump and Elon didn’t believe they were reaching a lot of people on the platform, they wouldn’t be using it. Kind of a chicken and egg question. Jack built (and recently rebuilt to a degree) the platform.

[imeldo marcos]

let me tell you the story of a bug they discovered that lets advertisers target their ads to certain groups of people. The story is simple, the bug wasn't a bug. It was there on purpose.

[JP24]

I know that story well. Whether it was a ‘feature’ or a bug, they were able to recover with a strong Q4 after removing it.

[MJ Pragmatist]

Bring back Noto. Promote someone internally. Sell the company. Lots of choices, but I’m voting for Jack to hit the road.

[mikefornow]

me too! I'm voting to have him hit the road as well.

[Stone Fox Capital]

@MJ Pragmatist @mikefornow
He needs to become Chairman, which is basically what he does now.

[Buzzly3]

Noto raped Twitter's piggy bank.

[Boraxis]

Fools rush into where angels fear to thread. Didn't they replace Jack Dorsey with a business school CEO, Dick Costolo. And what happened next: Twitter was worse on every single metric: user engagement, revenue, you name it. So, Jack comes back and stops the disaster, and now some Wall Street raiders with barely 3% of the company want him replaced. With who? With another Costolo?

You guys must be insane if you think that this guys will show up, replace Jack, and magically the company will make billions overnight.

[Boraxis]

Also these ideas for subscription services are garbage. Why do you think Zuckerberg went great lengths to say that Facebook will always be free for users? Because he's stupid? No! Because knows that as soon as subscription services is a thing, users will leave the platform en masse! So you want some corporate Bozos, that don't even have a twitter account, that do not know anything about social media, experiment with some wacky ideas that will bring in a quick buck but ruin the company? No, thank you!

[LongTermMan]

Boraxis. I agree with you. Having a subscription service on Twitter will be a disaster. A total disaster. I don’t know why that is even being considered. Focus on Periscope and establish a way to monetize that platform. That will be the key to future revenue and user growth.

[JP24]

I don’t know if I agree completely with all of that. I’m on record as saying that I think Dorsey has done a terrific job at Twitter and I’m not ready to push him out at this point. But, it is time now to better monetize the platform. I’m also not sure that a subscription service would necessarily be a bad idea. But it would have to be something on top of the existing service and not a replacement of it. You should be always able to join and view Twitter for ‘free’. But there may be some value added services that they can provide to publishers (producers of content) that could command small subscription fees. Their Data Licensing business may be laying the groundwork for something like this.

[mannybon]

Stone You keep mentioning Vine Twitter no longer owns Vine.