Twitter: There's Still Much For New CEO Parag Agrawal To Prove
Summary
- Twitter is making a monumental change as it appointed CTO Parag Agrawal as its new CEO to replace Jack Dorsey.
- Twitter also appointed Salesforce's newly appointed co-CEO Bret Taylor as independent chairman.
- Nevertheless, we think there's still much for Agrawal and Taylor to prove moving forward.
- The sell-off in TWTR stock has made it look attractive again. We discuss whether it's an appropriate time to add exposure.
- I do much more than just articles at Ultimate Growth Investing: Members get access to model portfolios, regular updates, a chat room, and more. Learn More »
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Investment Thesis
Twitter, Inc.'s (TWTR) CEO transition has hogged the headlines lately, as "part-time" ex-CEO Jack Dorsey has been replaced by his CTO Parag Agrawal. While Dorsey's move hasn't been surprising, the timing was.
However, we believe that the change was imminent. Twitter reported a robust set of topline growth in its recent FQ3 report card. However, monetizable daily active users (mDAU) growth hasn't been stellar. The calls for the change in Twitter's top executive have finally gotten to Dorsey. He finally realized that perhaps in Twitter's next phase of growth, he probably wasn't the best choice, given he also needs to focus his attention as Square (SQ) CEO.
Therefore, we believe that Dorsey's decision to step down should be regarded as a positive development. Nevertheless, the reception of having CTO Agrawal, who has been with TWTR since 2011, to replace Dorsey has been mixed. But, investors should note that TWTR also brought in Salesforce's (CRM) newly appointed co-CEO Bret Taylor as independent chair. Taylor is a highly respected innovator, and hopefully, he can play an essential role in helping steer Twitter's fortunes moving forward.
We discuss whether readers should consider adding TWTR stock as the company undergoes its CEO and chair transition.
TWTR Stock 3Y Performance
TWTR stock 3Y performance (as of 30 November 21).
TWTR stock started the year with aplomb as it raced to a YTD lead of 42% by February. Then, however, the stock was battered in the market rotation towards value stocks. As a result, its upward momentum quickly shifted, although it attempted a recovery in H2'21. However, the stock's rally was unhinged with its social media peers in late October and sank since.
In addition, TWTR stock is also underperforming Meta Platforms (FB) stock and Snap (SNAP) stock, and the broad market.
Twitter's US Active Users' Growth has Been Tepid
Twitter mDAU by region. Data source: Company filings
Twitter mDAU YoY change. Data source: Company filings
Readers can quickly glean that Twitter's growth in its mDAU has slowed down tremendously since FY19. Notably, the increase in its US mDAU has also been flat since FY20. Hence, TWTR's mDAU growth has mainly been underpinned by its international mDAU growth. TWTR's mDAU increased at a CAGR of 19.4% over the last three years, which is highly respectable. But, US mDAU increased at a CAGR of just 12.5%, while international mDAU increased at a CAGR of 21.1%. The US segment is a significant revenue driver for Twitter. Therefore, having just 37M mDAU in a market where SNAP and FB dominate is not good enough.
Meta Platforms US & Canada DAU. Data source: Company filings
Snap North America DAU. Data source: Company filings
Moreover, we can also glean from Snap and Meta Platforms DAU in their most crucial revenue region: North America. But, again, we must emphasize that FB and SNAP's metrics refer to North America, while TWTR refers to US numbers.
Notably, both SNAP and FB have seen even slower MAU growth than TWTR in their critical revenue region. For example, SNAP's North America DAU grew by a CAGR of 6.7% over the last three years, while FB's US & Canada DAU grew by a CAGR of 1.9% over the same period.
Therefore, Twitter has been performing remarkably well in its US MAU growth. However, the growth seems to have plateaued lately as its US mDAU hovered at 37M in FQ3'21. Moreover, given the size of FB and SNAP's massive DAU base, TWTR has been unable to gain sufficient influence in the US and trouble its larger rivals. Therefore, Agrawal & Co. must speedily address these issues. In addition, Twitter must find a way to penetrate its larger rivals' massive user base to resume its uptrend trajectory of previous years.
Agrawal certainly understood the scale of his appointment, as he emphasized in a note to employees on Monday. Twitter's new CEO articulated (edited):
We recently updated our strategy to hit ambitious goals, and I believe that strategy to be bold and right. But our critical challenge is how we work to execute against it and deliver results -- that’s how we’ll make Twitter be the best it can be for our customers, shareholders, and for each of you. The world is watching us right now, even more, than they have before. It’s because they care about Twitter and our future, and it’s a signal that the work we do here matters. (from Bloomberg article)
Nevertheless, Twitter's Monetization Has Been Largely Effective
Twitter revenue and YoY change. Data source: S&P Capital IQ
Twitter advertising revenue. Data source: Company filings
Nevertheless, we believe that investors must still give credit to Jack Dorsey. Twitter has still been able to monetize its properties and user base well despite the criticisms over its lack of innovation and execution. The company reported revenue of $1.28B in FQ3'21, up 37.1% YoY. Moreover, its advertising services segment has also continued to perform robustly. Advertising revenue was up 41.1% YoY. Furthermore, Twitter telegraphed that it had experienced only a modest impact from Apple's (AAPL) IDFA changes. CFO Ned Segal emphasized (edited):
We continue to see opportunities around personalization on Twitter as we better leverage our unique signal to improve people's experience and show their more effective ads across both brand and direct response. The revenue impact we experienced from ATT in Q3 increased on a sequential basis but remains modest. It's still too early for Twitter to assess the long-term impact of Apple's privacy-related IOS changes, but the Q3 revenue impact was lower than expected, and we've incorporated an ongoing modest impact into our Q4 guidance. We've seen our product development, both related to and distinct from ATT, improve the performance of our products, and we expect that to continue. (from Twitter's FQ3'21 earnings call)
Twitter US average revenue per daily active user. Data source: Company filings
Notably, its US average revenue per daily active user (ARPU) reached $20.05 in FQ3'21, which was also a three-year high. Twitter has been able to monetize its US user base effectively despite the marked flattening in growth. Therefore, the concerns over Twitter's monetization engine have been misplaced. The robust increase in advertising revenue has also been encouraging. Nevertheless, the problem is over the lack of further penetration by Twitter into its most important US user base despite being so far behind Snap and FB.
Therefore, if Twitter could make significant headway against its peers, the opportunity for robust growth moving ahead could be massive.
We believe investors can be encouraged because Twitter appointed its CTO to lead the company moving forward. It shows that Twitter wants technology and product innovations to be a critical driver of its future growth. Moreover, the appointment of Salesforce co-CEO Bret Taylor as independent chairman is also significant. Widely touted to be the future #1 executive of CRM, Taylor played an increasingly important role since he joined Salesforce management when the software behemoth acquired Quip in 2016. The Information reported in October that Taylor has been instrumental in pushing for product development and innovation in Salesforce. It added (edited):
At the same time, engineers at the company have long felt they were lower in the pecking order at the company than their sales and marketing colleagues. Taylor, a respected technologist, has already begun pushing Salesforce to focus more on building better products in his five years at the company and would likely shift that emphasis further. His appointment as CEO could help Salesforce attract more engineering talent. "Many executives at big companies are pushing back on cloud vendors, including Salesforce because they don’t feel like they’re innovating quickly enough,” said Adam Mansfield, director of services at UpperEdge. “Appointing Taylor as CEO would tell them you’re getting an executive who is focused on building innovative products and isn’t just focused on sales. (from The Information article)
We believe that the Agrawal and Taylor partnership could be transformative for Twitter as it charts its new journey post-Dorsey. The market is undoubtedly expecting more clarity and solutions from Twitter's board moving forward. Sanford C. Bernstein also weighed in (edited): "What's going to be Agrawal's North Star that he puts out there to kind of bet the farm -- or at least his career -- on? And then how successful will he be at delivering against that?"
So, is TWTR Stock a Buy Now?
Twitter stock EV/NTM EBITDA 3Y mean.
Twitter stock EV/Fwd Adj. EBITDA valuation trend. Data source: S&P Capital IQ
Twitter stock is currently trading at an EV/NTM EBITDA of 23.8x, primarily in line with its 3Y mean of 24.2x. Therefore, the stock doesn't look expensive now after its sell-off. It's starting to look attractive again.
Moreover, consensus estimates continue to point to a stock that will continue to grow its adjusted EBITDA profitability fast. Readers can easily refer to the EV/Fwd Adj. EBITDA valuation trend above. Therefore, if investors have been waiting for an opportunity to add TWTR stock, the current valuation seems reasonable. We believe that Dorsey is leaving the company in safe hands. Under the stewardship of Agrawal and Taylor, we believe there is potential for TWTR to make successful forays into the hegemony of FB and SNAP in the social media space. While it's still very early, the valuation is also attractive as well.
Therefore, we rate TWTR at Buy.
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This article was written by
JR Research is a seasoned investor with a background in economics. He focuses on identifying growth companies, market trends and growth opportunities. His approach combines price action with fundamentals.
He runs the investing group Ultimate Growth Investing, which specializes in identifying high-potential opportunities across various sectors. The group is designed for aggressive investors seeking to capitalize on high-growth opportunities, and investors looking for growth opportunities at a reasonable price. Learn more.Analyst’s Disclosure: I/we have a beneficial long position in the shares of SQ, FB, SNAP either through stock ownership, options, or other derivatives. 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.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.
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