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Takeaway: It appears TWTR's monetization targets are still trumping its user growth priorities, which is becoming a longer-term structural issue.

KEY POINTS

  1. BAD PRINT, SMART MOVE: TWTR 3Q's results came above estimates, which was largely expected given the preannouncement.  MAU growth wound up missing expectations, with US MAU growth slowing to 5% y/y (ex FFs).  TWTR took its first step toward rebasing 2016 expectations by issuing 4Q guidance ~$40M below consensus estimates, with the midpoint of guidance assuming 47% y/y growth, which is a deceleration of 11 percentage points from 3Q15, and basically inline with what consensus is expecting for growth for all of 2016 (45%).  Naturally, we should expect 2016 estimates to come in from here; question is how much.
  2. AUTO-PLAY ACTION: TWTR’s ad engagements spiked 94% sequentially, alongside a -42% decrease in CPE; collectively a divergence that we haven’t seen since the 2Q13 Supply Shock, suggesting that TWTR may be stuffing the feed with more ad load (see chart and note below for detail).  While mgmt suggested that ad load remained flat q/q, it also stated that autoplay "uses less inventory on a monetization basis".  That basically means that auto-play has a lower engagement threshold vs. TWTR's legacy ad products (e.g. 3-second view vs. ad click).  That said, TWTR essentially swapped out its legacy ad load for more intrusive ads that are harder to avoid, which is basically the same thing as stuffing the feed.
  3. MORE OF THE SAME?  We suspect TWTR has been chasing short-term upside at the expense of long-term damage to its model in the form of cumulative US MAU churn (HRM survey = 38%), which we attribute to surging ad load.  While mgmt unapologetically guided light for 4Q, which is encouraging, it still appears that its monetization targets are trumping its user growth priorities (Point 2).  That said, if TWTR continues to chase estimates with excessive increases in ad load next year, it will come with the risk of a potential y/y decline in US MAUs.  We wouldn't be too quick to rule that out given its heightened cumulative churn and growth already slowing into the mid-single digits.

TWTR | Auto-Play Action (3Q15) - TWTR   Ad eng vs. Price q q 3Q15

TWTR | Auto-Play Action (3Q15) - TWTR   Ad eng mau q q

See notes below for supporting analysis on TWTR's user retention issues and monetization strategy.  Let us know if you have any questions, or would like to discuss further.  

Hesham Shaaban, CFA


@HedgeyeInternet 

TWTR: The Crossroads  (User Survey: n=7,500)
08/25/15 07:48 AM EDT
[click here

TWTR: What the Street is Missing
05/19/14 09:09 AM EDT
[click here]