The Sobering Reality of Twitter's Addressable Market

Investing in Twitter (NYSE: TWTR  ) requires the conviction that the company will eventually become profitable, and its user base will continue reaching new heights. On the surface, with only 232 million monthly active users, or MAUs, Twitter's user base seems likely to keep growing in the years ahead because there are potentially over 2.4 billion Internet users in the world for it to tap into. However, there is mounting evidence to suggest that Twitter's total addressable market may be much smaller than this figure.

Exhibit A
While Twitter happily reports the number of MAUs engaging on its network, you'll never hear about the total number of registered Twitter accounts, including ones that have abandoned the site since registering. Twopcharts has been tracking Twitter usage, and currently estimates the total number of registered Twitter accounts at more than 887 million. Compared to Twitter's official MAU base of 232 million, it suggests that nearly four times as many accounts exist than are currently active. Twitter may have a serious issue on its hands.

In case you were wondering, Twopcharts was the same outfit that estimated Twitter's MAU base to be 138 million MAUs at the end of the first quarter in 2012, lining up exactly with Twitter's official 138 million MAU figure for the period. What's more, a Reuters-Ipsos poll found that 36% of users who joined Twitter don't actually use it. In the same survey, Facebook experienced a 7% attrition rate.

Your point?
Assuming Twopcharts' estimate is accurate, it implies that Twitter's actual addressable market is much smaller than Facebook's. The reason is because it takes nearly four accounts to create one MAU; this means that Twitter needs a significantly larger addressable market to achieve a MAU base along the lines of Facebook's roughly 1.2 billion MAUs. There simply aren't enough Internet users in the world for this to be possible.

With more than 2.4 billion Internet users throughout the world, and only 26% of registered Twitter accounts actually become MAUs, a back-of-the-envelope calculation puts Twitter's addressable market somewhere in the neighborhood of 625 million. From there, this figure is dramatically reduced by the fact that China represents roughly 24% of the world's Internet users, and has a strict censorship policy in place that prohibits the open use of Twitter within its borders. More realistically, Twitter's maximum addressable market today is likely around 475 million MAUs – roughly double today's MAU level.

Temper your expectations
Twitter may be a household name, but its addressable market is likely much smaller than Facebook's. Normally, this wouldn't be an issue; but after taking into account that the company had a stellar IPO debut, the expectations bar has been set exceedingly higher. In this context, Twitter needs all the MAU growth it can get to help drive revenue growth and achieve the historic milestone of profitability -- something that isn't expected until 2015 or later.

Going forward, investors should continue monitoring Twitter's MAU growth rate for signs of potential trouble, and also be on the lookout for any evidence to suggest that Twitter is able to expand its addressable market beyond what's possible today.

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