Twitter – Hopes and dreams

Far more changes are required to meet the long term goals.

• Twitter made some bold promises at its analyst day giving investors some confidence and sending the shares up 7%.
• Firstly, a series of product announcements aimed at increasing engagement for logged-on users and casual visitors that include:
  • Instant timeline. Gives new users and casual visitors an idea of what is going on without having to follow anybody right away.
  • “What you missed”. Curates a list of tweets that were posted since the user logged in.
  • Homepage. A new design to make the homepage more engaging for both logged in and casual visitors.
  • New apps. New apps for mobile beyond Twitter and Vine will be released although what function they will serve is unclear.
  • Localised and event content. Content will be location aware and also curated by events that occurring around the user.
• Secondly: Twitter provided some numbers that gave some context around the size of its audience and its long term targets:
  • Audience: Twitter estimates that its total audience is roughly twice the size of its user base at around 500m.
  • Long term audience: Twitter thinks that by 2020 it will have a reach of 2bn people, 4x where it is today.
  • Long term revenues: Twitter thinks that it can reach around $14bn in revenues within around 10 years, up from about $1.4bn in 2014E.
• Thirdly: The company tried to play down the recent executive turmoil and turnover but in reality it explained very little.
• Twitter is rapidly approaching saturation with its existing business and there has obviously been large differences in opinion in terms of where the company should go from here.
• The fact that the head of product role has changed numerous times recently is a bad sign which only adds to the issues created by the departure of the head of analytics and VP of engineering at the end of October.
• The medium term path has now been laid out and I hope that Costolo now has his ship under control and that turnover will now cease.
• It will be a very bad sign if departures continue.
• From the long-term goals it is clear that Twitter has no chance of meeting them unless there are fundamental changes.
• I estimate that in its current form Twitter revenues will normalise at around $2bn.
• This is because users only spend a very small portion of their Digital Lives engaging in microblogging.
• Consequently, the information that Twitter receives about its users is more limited and the opportunity it has to advertise to them is also much shorter than for other activities like social networking.
• Furthermore, Twitter knows nothing about at least half of the users that are viewing the tweets making targeting more difficult.
• Some targeting will be possible based on the nature of the tweets being viewed, but the quality of these adverts and the revenues earned will be much lower.
• In order to get to $14bn in revenues Twitter needs to address far more of the Digital Life pie and it must do so effectively.
• Assuming it is a good instant messaging platform, Twitter currently addresses 9% of the Digital Life pie (see here).
• If it can increase its reach to 2bn viewers on a monthly basis, I would estimate that Twitter needs to cover at least one third of the Digital Life pie to reach $14bn in revenues.
• This means it will have to have a stab at competing in social networking, gaming or media consumption.
• Of this, there is no sign and until there is I think it very unlikely that Twitter will ever come close to this target.
• If it increases its reach to 2bn viewers with no changes to its current activity, revenues might just make $4bn in 2020E.
• Either way it is clear that Twitter is not the next Facebook (see here) and while investors continue to pin their hopes on this dream, they are in for disappointments.
• Twitter is a great company but I think the stock will remain bad for now.