Twitter – Face change.

There is no longer a reason to sell.

• Twitter is no Facebook but I suspect that the next 2 years could follow a very similar story.
• Twitter’s stock has collapsed from its high of $73 for two main reasons.
  • Its user growth has failed to follow the course that the market was expecting.
  • The market has finally realised that Twitter is a niche player in the Digital Ecosystem and that revenues are consequently limited.
• This has created a lot of selling pressure and with highly valued stocks a trickle very quickly becomes a rush.
• That rush shows no sign of abating.
• As far as I am concerned, the fundamentals of Twitter remain unchanged.
• Twitter is the king of microblogging which is represents a small slice of Digital Life with a maximum revenue opportunity of $2bn.
• I expect Twitter to hit this revenue figure in 2016 and, unless something changes, growth to grind to a halt.
• RFM research values this scenario at $32.0 (see here) per share meaning that the shares are now at fair value.
• This scenario gives Twitter 2 years to find a way to expand its offering into other areas of Digital Life thereby increasing its total addressable market meaningfully.
• This means expanding the Twitter service to encompass other functions such as e-commerce, media consumption, messaging or gaming.
• Messaging would be a quick win as currently Twitter users can message each other but it is cumbersome and limited.
• Success in another Digital Life segment would substantially increase the revenue opportunity and keep revenue growth going beyond its current limit of $2bn.
• Unfortunately, I suspect that things are going to get worse before they get better.
• The tide of market opinion has turned against Twitter and people are likely to continue heading for the exit.
• Furthermore, I suspect that future results will show more of the same steady development rather than the blow-out that the bulls had been hoping for.
• This will keep the shares unpopular and unpopular stocks tend to drift downwards with time.
• In order to turn the shares around, Twitter needs to find a new source of revenues and this is what it is trying to do with Amazon, American Express and Chirpify in e-commerce.
• When this starts to get traction or Twitter starts to see revenues from another segment of Digital Life, it will then report a blow-out set of earnings and the shares will recover.
• This is exactly what happened to Facebook when it suddenly worked out how to monetise traffic coming from mobile devices.
• Until then, the sellers will outweigh the buyers and I can see the shares going meaningfully below fair value.
• The investor has missed the sell window but is now being fairly compensated given the reality that Twitter faces.
• The time to buy, however, is still quite far off.