Twitter – Clouds of sound.

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 10% of SoundCloud fixes nothing.

• Twitter is investing $70m in SoundCloud by taking the majority of its current $100m funding round that will value the company at $700m.
• This will give Twitter a 10% stake in SoundCloud (and I presume a seat on the board) but how this will help to alleviate Twitter’s current predicament remains a mystery.
• Twitter remains 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.
• 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.
• Unfortunately, buying a 10% stake in SoundCloud will do none of these things.
• Media Consumption represents 10% of the Digital Life Pie and if Twitter was to adequately cover this activity with a service of its own, its revenues could start growing once again.
• However, a 10% stake buys Twitter very little in terms of a new ability to offer a Twitter service in that segment and Twitter users are very unlikely to start rushing to the SoundCloud service as a result.
• Furthermore, Twitter will not own nor be able to monetise any of the data that SoundCloud generates meaning that, in reality, this investment changes nothing.
• To really own a Digital Life segment will require 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.
• Twitter’s market capitalisation remains at $11bn which represents a 2016E EV / Sales multiple of 3.8x.
• This is a very high number to pay for a company that is not growing and this is why I continue to think the shares could test $10 per share sometime this year.
• I remain very cautious on Twitter and would prefer almost any other ecosystem player to this.