Twitter – Bloody hands

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Twitter could easily trade below $10 per share.

• Everything is changing at Twitter except the one thing that really matters: its strategy. .
• Part time CEO Jack Dorsey is cleaning house with 4 senior executives removed and the likelihood of 2 new board members to come.
• Head of engineering, head of media partnerships, head of HR and head of product have all “chosen to leave” with existing execs picking up these roles on a temporary basis.
• The net result is further uncertainty and the very real likelihood that any recovery is going to take longer than many are hoping.
• Twitter is in a strategic bind.
• Its service is extremely effective and very well monetised but it is such a small piece of Digital Life that its monetisation potential is fundamentally limited.
• Furthermore, I think that its service is quite niche meaning that it appeals only to a subset of users which is why its user growth has also ground to a halt.
• Shuffling management and reducing headcount should help improve profitability but they do nothing to return the company to top line growth.
• I think that the answer to Twitter’s problems can be found in the Digital Life pie where Twitter has coverage of just 17%.
• This is what I think must be addressed.
• Twitter needs to encourage users to spend time beyond microblogging engaged with a Twitter service.
• If successful, I suspect that this would stimulate user growth which combined with the increased Digital Life coverage would get revenues growing quickly once again.
• The problem is that this requires a bold decision to be taken with regards to which Digital Life segment it should cover combined with heavy investments to bring it to fruition.
• This necessitates a driven and focused CEO with a dedicated, talented and stable management team.
• With constant turnover and a part-time CEO, I just can’t see how bold decisions are going to be taken meaning that Twitter will continue drifting.
• With around 300m subscribers and 17% of Digital Life covered, I see Twitter generating revenues of around $2.1bn in 2016E.
• This is significantly below Bloomberg consensus which is calling for revenues of $3.1bn this year.
• Twitter currently has an enterprise value of $10.8bn ( it has $2bn in net cash) but compared to Google, it is still trading at a significant premium.
• Assuming that consensus is right, Twitter is trading on 38.7x 2016E EV/EBIT while Google is trading on 16.0x EV/EBIT.
• With growth having evaporated, I see no reason for Twitter to trade at a premium to Google and if I include my concerns with respect to consensus, there is still substantial scope for downside.
• Twitter could easily trade below $10 per share and bargain hunters are likely to end up with bloody palms when trying to catch this falling knife.
• Direction in strategy, a focused CEO and an end to management turnover are the minimum that is required to halt the slide.