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Takeaway: TWTR is risking long-term damage to its business model by trying to appease the street. Mgmt needs to shift gears before it’s too late.


  1. THE PROBLEM: Monetization is coming at the expense of user growth and retention.  TWTR runs a CPC ad model, meaning the user must engage with TWTR’s ads in order to generate revenue.  In order for TWTR to drive the level of revenue growth the street is expecting, it must continually introduce more and more ad load, which has historically pushed its more casual users away.  In short, TWTR has been chasing good prints at the cost of potential life-time users.  Longer-term, TWTR’s business model will be hampered by its cumulative churn, leading to a smaller user base to distribute ad load on to, hence lower potential revenues down the road.
  2. THE DATA: We have seen this dynamic playing out throughout TWTR’s reported history, with US MAUs and Ad Engagements (proxy for ad load) moving in opposite directions (see note below).  We also ran a survey attempting to segment TWTR’s users by engagement levels (n=7,500).  What we’ve found is almost 40% of respondents with a twitter account are no longer using the platform.  Of those that do remain, roughly half do not use the platform daily, suggesting they are more casual users, hence more likely to churn off.  The good news is that there is still room for user growth (estimated 38% US penetration), but not enough to support a model with elevated churn.
  3. THE CROSSROADS: TWTR needs to decide what matters more: appeasing near-term street expectations, or building a sustainable business model.  The latter means that TWTR needs to prioritize the user; both attracting new users and reclaiming the ones that it has lost.  We’re not sure exactly the best way go about doing that, but what we can say is TWTR can’t win the user while simultaneously chasing lofty consensus revenue expectations with rampant increases in ad load.  Mgmt's approach to 2016 guidance will essentially tell us where its priorities lie; i.e. whether TWTR is a secular short or something we can potentially get behind.  For now, we remain short.  

TWTR: Are Acquisitions Enough?
03/17/15 08:50 AM EDT
[click here]

TWTR: The Crossroads  (User Survey: n=7,500) - TWTR   Ad eng vs. MAU 2Q15

TWTR: The Crossroads  (User Survey: n=7,500) - TWTR   User Survey Churn 3Q15

Let us know If you have any questions or would like to discuss in more detail.

Hesham Shaaban, CFA