SUMMARY: While the street has soured on the TWTR story following what appeared to be a failed attempt to sell itself, we don’t believe the gravity of the situation is fully appreciated. We believe TWTR is facing declining ad revenue growth over the NTM; the magnitude of which will only be exacerbated by mgmt’s newfound focus on profitability. Naturally we are leaning short, but we're not sure how much we would be playing for since there may be an embedded floor in the stock from takeout speculation, which we see as baseless. But even with that potential floor, we actually see more risk to playing TWTR on long side this year.
The bulk of this deck will focus on TWTR’s short public history; not so much on what has happened, but why it happened and what that means for the NTM.
KEY POINTS OF DISCUSSION
- SCARED OF THE STREET (2014-1H15): Instead of rebasing expectations early on, we estimate that mgmt chose to chase consensus estimates with rampant increases in ad load, which was not only pulling monetization forward, but pushing TWTR’s users away at the same time. The issue escalated to the point where TWTR's model became all but structurally defunct in less than two years as a public company.
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AUTOPLAY = LEGACY CPC SIPHON (3Q15-3Q16): Autoplay became the story (introduced mid 3Q15). We estimate that it drove nearly all of TWTR’s ad revenue growth though 2016 YTD, but at the expense of its legacy CPC ad products. Some of that can be attributed to shifting ad budgets, but we suspect the bigger issue is that TWTR had no choice but to pull back on legacy CPC, suggesting inventory remains an issue.
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STEPPING OFF THE PLANK (NTM): TWTR will fully lap the autoplay launch in 4Q16, after which we expect it to be facing declining ad revenue growth. We suspect mgmt’s decision to cut its salesforce and refocus its efforts on EBITDA was a weak attempt to change the story before that occurs, and will only exacerbate the problem. Meanwhile, consensus is looking for slowly accelerating ad revenue growth through 2017.
The call should run for about 30 minutes. More detail to follow Thursday morning.
