Facebook’s (NASDAQ: FB) market cap is more than 20x Twitter’s (NYSE: TWTR).
It has nearly 10x the daily active users.
In Q3, Facebook’s average revenue per user (ARPU) was $7.89, while Twitter’s was estimated at $4.30.
Many are ready to give up on Twitter. Or they did years ago. I agree with the naysayers in some respects: Twitter has dropped the ball on innovation – though this is changing – and it will never come close to catching Facebook.
That said, the market is too pessimistic about Twitter’s long-term prospects. Particularly following the company’s Q3 earnings release.
User Growth Disappointed
In Q3, Twitter’s monetizable daily active user (mDAU) base grew 29% yoy to 187 million. That sounds great until you consider that it was only a 1 million user gain from the previous quarter and fell short of expectations of 195 million users.
Revenue was up 15% yoy to $936.2 million, well above consensus estimates of $777.3 million. But it didn’t matter. Twitter shareholders dumped the stock; shares closed down more than 21% following the report.
TWTR has since recovered some of those losses, but is still trading nearly 9% shy of where it was just prior to the earnings release.
I was also disappointed with the user growth, but felt that the revenue growth didn’t get enough attention. Ad revenue makes up the lion’s share of Twitter’s top-line. It was up 15% yoy to $808 million in Q3, after being down 22% yoy in Q2. The pandemic has created a tough advertising environment, and it was quite possible that Twitter wasn’t going to return to double-digit revenue growth until 2021. That it did so in Q3 shouldn’t be overlooked.
Twitter is Starting to Innovate
You won’t mistake Twitter for Square (NYSE: SQ) – the other company that CEO Jack Dorsey runs – which has made innovation a part of its identity. But Twitter knows that it hasn’t innovated enough, and is taking steps to improve on that front. Dorsey said the following on the Q3 earnings call:
“We’re getting better and better at recommending things that are going to be relevant to more people. And that said, we saw 70 million accounts follow topics, which is up 40% quarter-over-quarter and we now have over 5,000 topics and interests, which is over, which is up 25% quarter-over-quarter. All this gives us much stronger signal because it's much more direct intent.”
In addition to “topics,” Twitter has been considering subscription and commerce opportunities. The details remain to be seen, but careful experimentation with new ideas will move Twitter forward in the long-run – and be a boon for shareholders.
What’s important is that Twitter doesn’t lose sight of what made it special in the first place: the ability to distribute content in an unobtrusive manner.
What About Censorship?
People on both sides of the political aisle have been unhappy with Twitter’s censorship decisions. Some say that Twitter has done too much, and others say that the platform hasn’t done enough.
Either way, I expect Twitter to find a sensible middle ground in the long-run where they can eliminate harmful content but not threaten the platform’s ability to give everyone – or everyone that behaves respectfully – a voice.
Twitter, like Facebook, has so many advertisers. Even if Twitter loses a few, it won’t make much of a dent on the bottom-line.
Twitter Has Untapped Potential
Glass half-empty: Twitter has fallen short of its potential, and growth is going to stall out.
But I choose to look at it glass half-full: Twitter has a lot of untapped potential. There are signs that Twitter is going to figure this out – and if it does – the platform has immense upside. Again, Facebook has nearly 10x Twitter’s user base and almost double its ARPU. If Twitter is able to gain ground in one – or both – of those metrics, shares would have a lot of room to run.
I like the odds of that happening and that’s why I recommend buying and holding TWTR.
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