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Takeaway: The story has devolved from lofty consensus estimates to a structurally challenged model. Mgmt needs to decide what matters more.

KEY POINTS

  1. PICK YOUR POISON: The problem with the TWTR story in its short public history is that street demands upside on both revenues and MAUs, but those two factors have historically been working against each other. The common denominator is excessive ad load, which is driving monetization, but pushing the user away at the same time.  The problem isn't ad load per se, but the magnitude at which TWTR had been increasing it on a relatively disengaged user base (last reported DAU/MAU % <50%).  In short, TWTR generally can't beat on both revenue & MAU expectations at the same time, which is basically why the stock has sold off on 6 of 8 prints.  
  2. CROSSROADS: The dynamic above has devolved into a potentially dangerous situation where TWTR could see declining y/y users if mgmt doesn't take its foot off the gas with ad load.  For context, US MAU growth has decelerated to 5% y/y in 3Q15 from 19% as recently as 3Q14.  Further, our survey results suggest that nearly 40% of its US users are no longer using the platform, which means it longer-term revenue potential is compromised.  That said, TWTR needs to decide what matters more: chasing consensus estimates with excessive increses in ad load or prioitizing the user in hopes of getting some of them back.
  3. THOUGHTS INTO THE PRINT: We suspect mgmt realizes that it's been shooting itself in the foot by trying to appease the street, and its sandbagged 4Q guide suggests it may be changing its approach to managing expectations.  We're expecting a light 2016 guidance release vs. consensus estimates that are implying a persistent surge in per-user ad engagements since MAU growth has all but flattened out in the US, which is where the majority of its ad revenue comes from since it monetizes US at nearly 7x Int'l (on an ARPU basis).  However, if TWTR attempts to appease the street by guiding to consensus estimates, then this could turn into a negative US MAU story.  Either way, we see at least one more leg down to the short.

TWTR | Thesis Refresh (2016) - TWTR   Ad Engagement vs. MAU 3Q15

TWTR | Thesis Refresh (2016) - TWTR   Survey Churn 8 15

TWTR | Thesis Refresh (2016) - TWTR   Ad MAU vs. CPE 3Q15 v1

See notes below for supporting analysis and recent thoughts.  Let us know if you have any questions, or would like to discuss in more detail.

Hesham Shaaban, CFA


@HedgeyeInternet 

TWTR: What the Street is Missing

05/19/14 09:09 AM EDT
[click here]

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

TWTR | Auto-Play Action (3Q15)
10/28/15 09:12 AM EDT
[click here]