From reading all of the stories floating around about Twitter (NYSE:TWTR) getting demolished by the likes of Facebook (NASDAQ:FB) and Snapchat, one would think that the company is practically on death’s door.
Indeed, Twitter seems caught in the wilderness, wandering aimlessly in no particular direction as its user base shrinks. The company reports about 317 million users, but no one knows how many actively use the service. Meanwhile Snapchat (or simply “Snap” as the company now refers to itself) readies for an IPO expected to value the business of 300 million users at $25 billion. Looming over both is Facebook and its Instagram subsidiary, valued at $382 billion for a combined 2.5 billion users.
The stock’s return since its IPO in 2013 stands at an abysmal -60 percent. Remember that first trading day? So many know-nothing investors tried jumping into the stock that many of them confused Twitter with the defunct electronics retailer Tweeter. The latter’s stock briefly rocketed up 1,500 percent. Oh, the good old days of unbounded hype (oh wait-now we have Snapchat…ahem…Snap, Inc.).
I digress. The point is that Twitter’s dramatic about-face makes the stock a lot more interesting. Not only did the market cap taken a hit, but note the current value per user: Facebook is worth something like $155 per user, followed by Snap at $83 per user. By comparison, Twitter’s $38 per user seems downright cheap. Maybe it is cheap for a reason. Perhaps the other companies are just overvalued.
Let’s drill down to the essence of Twitter. What kind of company is it, exactly? From the looks of it, Twitter itself is still trying to figure out the answer. But allow me to take a stab.
First of all I think that reports of the company’s death are greatly exaggerated. Although it is no longer the cool kid on the block, Twitter has matured into a service used by prominent politicians, celebrities, companies, governments, journalists, businesspeople, and everyone else in between. Almost every person and entity with an influence on society regularly communicates with the masses via tweet, including the incumbent President of the United States. Hell, Donald Trump might not be in the White House without his infamous Twitter rants.
Even for people who don’t have a Twitter handle, avoiding the company’s product doesn’t seem possible. Established news media regularly quote tweets as a primary source. Between actual users and consumers of news media, I’d wager that most of the country views Twitter’s content several times a week. I can’t prove it, but that’s my feeling.
So to me, Twitter looks like a cross between a social media outfit and a traditional media company. There is, of course, a fun social element to Twitter’s service. But the future of the company lies in its ability to leverage its influence on more traditional channels. Passive consumption of Twitter content remains a stubborn problem. Tweets are ubiquitous throughout many forms of media, but how does the company translate that into profit? With the recent flurry of acquisitions it is hard to know what CEO Jack Dorsey’s strategy is, or if he even has one.
Financially they don’t look great, but the state of the balance sheet isn’t yet a cause for alarm. Even as the stock declined, revenue soared from 665 million in 2013 to $2.5 billion over the past year. R&D as a percentage of sales fell from 89 percent in 2013 to 28 percent this year, although the company continues to blow through cash on acquisitions and other SG&A expenses. In terms of profitability the company just had its best year yet, if one regards a -8.5 percent return on equity as a step forward. The balance sheet looks okay, with $3.6 billion in cash and $1.6 billion in debt.
At the end of the day, Twitter’s brand will likely endure. It just seems too ingrained within the cultural zeitgeist to fade away, which I can’t say for Snapchat or even Facebook. The problem is that I don’t know if that brand is worth $12 billion. If Twitter is a traditional media company, should it be valued as a Time, Inc. (NYSE:TIME) or a Time-Warner (NYSE:TWX)? Honestly I can’t say. I myself have a Twitter, but seldom use it. In fact I’m not a big social media user in general, so I don’t feel comfortable buying the stock with the information that I have. I can’t pull the trigger without a clear path forward for the company, although I plan to keep my eye on this one.
No matter how you look at it, the company’s predicament is intriguing. I encourage readers to post their thoughts on where Twitter is and where it should go.