Twitter – Event horizon

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Sale of Fabric collapses Twitter’s horizons. 

• With the sale of Fabric to Google, Twitter has essentially given up all hope of becoming an ecosystem and its growth will be totally dependent on its ability to create engagement around media consumption.
• This means that a blue-sky scenario for Twitter will see it with 28% coverage of the Digital Life pie up from 18% today.
• In this instance, RFM estimates that the best possible revenue outcome for Twitter would be annualised revenues of around $3.9bn, growing 6-8% in the long-term.
• Twitter first unveiled Fabric in 2014 as a developer platform by which developers could create other services and then tightly link them to Twitter.
• The idea was that this would allow Twitter to collect data in other areas of Digital Life and thereby improve its addressable market when it came to monetisation.
• However, the fact that it has now sold this to Google is a sign that it has given up on trying to develop this avenue of expanding its business and is doubling down on media consumption.
• When it comes to monetising microblogging, Twitter is best in class but because it is present in such a small niche of Digital Life, growth has ground to a halt causing a major problem for both management and shareholders.
• This is why Twitter has been trying to develop a media consumption offering and why the live casting of NFL games over its service is such a big deal for the company.
• The response to the live streaming over Twitter has been quite good with Twitter adding 0.25m to the NFL’s regular audience of 15m or so but there is a very long way to go.
• However, it is still very far from challenging YouTube or Facebook Video which is why I need to see far more than just NFL streaming in order to become confident that Twitter has a media consumption offering that it can monetise.
• This is crucial because now that Fabric has gone, this is Twitter’s only real hope of extending beyond Microblogging and Instant Messaging.
• The narrowing of its horizons means that, while Twitter could increase its revenues to a new level (and hopefully make some profit), revenues of $8bn-$10bn look hopelessly out of reach.
• The company currently has an enterprise value of $10bn which looks much too high if the blue-sky scenario now returns maximum annualised revenues of around $4bn.
• Hence, I still think that the shares could test $10 per share at which point it becomes an attractive tuck-in acquisition for any of the big ecosystems to complement their existing offerings.
• Google, Facebook or maybe Tencent would be at the top of that list.