- 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.
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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.
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.
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.
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.
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.
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This article was written by
Stone Fox Capital (aka Mark Holder) is a CPA with degrees in Accounting and Finance. He is also Series 65 licensed and has 30 years of investing experience, including 10 years as a portfolio manager.Mark leads the investing group Out Fox The Street where he shares stock picks and deep research to help readers uncover potential multibaggers while managing portfolio risk via diversification. Features include various model portfolios, stock picks with identifiable catalysts, daily updates, real-time alerts, and access to community chat and direct chat with Mark for questions. Learn more.
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.
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