What's Really Going on at Twitter
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Wall Street has come to realize that connecting fans to celebrities, sports fanatics to game information, and the media to, well, the media via fleeting 140-character bursts will grow Twitter only so large. With 300 million users, this social media icon is still more than 1 billion shy of Facebook, whose footsteps it hopes to follow. The resignation of embattled CEO Dick Costolo won't change this fact. And now that ad revenue growth is also slowing, investors want to know if there's a growth plan in place, or if they should view the stock in another light—#buyouttarget.
Ad Growth Slows
Though nearly 90% of Twitter's revenues come from advertising, the company must still prove to Wall Street that ad sales can keep growing over time, says Barclays analyst Paul Vogel. Twitter must also demonstrate to advertisers that its platform is effective at influencing consumers.
Yet in the first three months of 2015, revenue growth fell off sharply as new features encouraging users to take action—by making a phone call or downloading an app—did not provide much lift. The news sent the stock down by 25% in late April. In response, the microblogging site acquired TellApart for $533 million. The tech-based marketing firm helps advertisers target consumers across multiple devices, including laptops, tablets, and smartphones.
Size Matters
There's another slowdown to worry about, which plagued Costolo before his resignation in June. User growth, which soared more than 30% in 2013, slowed to 5% in the first quarter. At this pace, Twitter is likely to double to 600 million by 2020, according to Oppenheimer, but that's less than half Facebook's size now. This deceleration "has stymied Twitter," says Rosenblatt analyst Martin Pyykkonen.
To encourage sign-ups, Twitter has provided instant feeds so new users can see tweets from the likes of Katy Perry before registering. It also struck a deal with Google, ensuring more of its content shows up in searches. But product enhancements alone won't be enough to find the next 300 million users, says Oppenheimer Internet analyst Jason Helfstein.
Priced at a Premium
Twitter's growing pains have led to rumors all year that it might be acquired. In late January, whispers that Google might want to purchase the network pushed Twitter's shares up 23% in two weeks. The result: Even with the late-April selloff, Twitter is "the fifth-most expensive-Internet stock," says Helfstein.
Costolo's departure—he was replaced on an interim basis by co-founder Jack Dorsey—won't stifle these rumors even as the company has reaffirmed its desire to go it alone. If Twitter isn't acquired, it must alter its ad model to reflect its niche audience or devise a strategy that can rival growth at places like Instagram, which now has more users. Trouble is, such a plan will take far more than 140 characters to convey.
NOTES: Quarterly revenue growth is based on a year-over-year basis. SOURCES: Morningstar, YCharts, company reports