This note was originally published at 8am on November 07, 2013 for Hedgeye subscribers.
“There is no terror in the bang, only in the anticipation of it.”
More than seven years ago, when the lads started @Twitter, I’m not sure they were anticipating today. At the time, there were simply brainstorming new business ideas and an idea for group SMS-ing was sketched out and not too long thereafter Jack Dorsey sent out the first tweet, which was:
“just setting up my twttr”
As I wrote in our Twitter IPO report earlier this week, it was certainly an inauspicious start. I mean, who would have thought a 140 character revolution would have started with that, but it did and with the anticipation of the $TWTR IPO now gone, and all we have left is today’s bang. (Not to be confused with the free fall in the #Euro from the 25 basis point cut in European interest rates.)
I can’t tell you for sure, but given the number of times the investment bankers have raised the offering price (and who doesn’t trust investment bankers!), there seems to be little doubt that there is demand for the offering. So, at the very least, we won’t have a $FB debacle on our hands. Of course, where the stock trades today is anybody’s guess.
In the face of the optimism around @Twitter today, we thought we’d offer some contrarian counter points to the positive outlook for the company. Yesterday, my colleague Hesham Shaaban (to give credit where credit is due Hesham did most of the work, but that’s why I’m the boss after all) and I gave a presentation on Twitter and raised a few flags. So, if you are going to own $TWTR for the long run, here are few things we would consider:
1. #OverseasUnderwhelming – Currently, @Twitter has 179 million monthly active users outside of the United States. This is compared to 53 million MAUs domestically. Shockingly, the company only generated 26% of its consolidated revenue from international markets in Q3 2013. On the metric of advertising revenue / monthly active user, the contrast is even more startling as US ad revenue / user is $2.10 in the U.S. versus $0.23. Or an almost 10x difference. The implication here is that there are structural constraints to monetizing international users, which leads us to the next key issue.
2. #UserGrowthSlowing – In Q3 2013, $TWTR has its lowest sequential growth quarter ever as global monthly active users grew only 6% sequentially. Now, admittedly, this is still meaningful grow off a base of more than 230 million MAUs, but compared to the prior four quarters, which showed 11%, 11%, 10% and 7% sequential growth, this is a marginal slow down.
Interestingly, @Facebook which has a penetration of 55% in the United States, compared to @Twitter’s penetration of 22%, has actually added more absolute users in the U.S. over the past three years. This of course leads to the next question as to how penetrated @Twitter is currently.
3. #Penetration - A recent poll from Reuters/Ipsos suggested 43% of people that have registered for a $twtr accounts have either shut their accounts down, or don’t use it. This compares to 12% for $fb on the same metrics. The implication for @Twitter is that the implied penetration may be much lower. For example, if 43% of users are actually inactive, this suggests a true penetration rate of all internet users in the U.S. of 39%, which implies a short runway of growth domestically.
Certainly, being one of the power users of @Twitter in finance, we do get the blue sky opportunity that @Twitter could evolve into a global cable network and become a true second screen for consumers. The pie for T.V. advertising is north of $70 billion by some estimates, so even a small share of this pie would be meaningful for @Twitter, but between now and then we have a richly valued company that faces business model headwinds.
In the Chart of the Day, we’ve provided a table that shows the multiple you’d have to be willing to pay of market cap / sales to get a certain level of return. As an example, if you buy the stock at $27 per share (effectively the IPO price) and you want a 20% return over the next year or so, you’d have to be willing to pay 15.0x our 2015 revenue estimate. (We have included the 150 million shares that will be dilutive post the IPO in our calculation of market cap.)
I’m not saying that won’t happen, but as Albert Einstein famously said:
“The distinction between the past, present and future is only a stubbornly persistent illusion.”
That all said, even as we have some issues with the @Twitter business model in the short run, there is no denying that the platform is revolutionary in its ability to allow the world to communicate, interact and engage. As my colleague @KeithMcCullough tweeted in 2010 to @matterhornbob:
“twitter is a very comfortable arena for an accountable athlete in this business to compete – we don’t want to hide”
Keep your head up and your tweets on the ice,
P.S. In other news, we’d like to wish a bon voyage to our long-time teammate @RoryAGreen who is leaving us for the confines of @Insead and a MBA. In celebration of this exciting move for Rory, and in appreciation of all his hard work, we will be tapping a keg of Guinness (he is Irish after all!) at our Stamford, CT office at 4pm.