Twitter, Inc.'s Next Growth Market: Video Ads?

The hope of video ads may make Twitter stock worth holding on to.

Mar 11, 2014 at 9:00PM

Google's (NASDAQ:GOOGL) YouTube brings in billions of dollars in revenue for the company every year, most of which is derived from video ads -- and competitors are noticing. About four months ago, Facebook's Instagram introduced video ads. Even Facebook itself is planning to launch video ads on its own platform by this summer. Now Twitter (NYSE:TWTR) has hired former YouTube executive Baljeet Singh as a product director in its revenue organization, with one of his roles including helping the company push new video ads, according to The Verge. For Twitter investors, this is excellent news.

Twitter Headquarters

Twitter headquarters. Image source: Twitter. Photo by Aaron Durand (@everydaydude).

What's so great about video ads?
First, they are extremely lucrative. YouTube, for instance, contributed about $2 billion of net digital ad revenue to Google in 2013, eMarketer estimates. Impressively, that $2 billion in net ad revenue was on just $5.6 billion in gross ad revenues -- that's about a 35% margin.

Adding perspective, eMarketer said that YouTube's ad revenue alone accounts for about 1.7% of global digital ad revenues, "higher than the market shares of Twitter, AOL,, Pandora, LinkedIn, Millennial Media and other large players."

Second, the digital video ad market is growing rapidly. In 2011, YouTube's gross ad revenue amounted to just $2 billion, significantly below eMarketer's 2013 estimate for YouTube's gross ad revenue at $5.6 billion. Or here's another way to look at YouTube's impressive growth: Year-over-year gross revenue growth for YouTube in 2012 and 2013 was 85% and 51%, respectively. Further, eMarketer says that YouTube now accounts for a whopping 11.1% of Google's total ad revenues, up from 5.5% in 2011.

Why does Twitter need video ads?
For investors, video ads on Twitter are likely a key ingredient for helping the company live up to the enormous expectations baked into its stock price. The company's $32.6 billion market capitalization calls for some impressive growth.

With Q4 revenue up 116% from the year-ago quarter, the company is living up to those growth standards -- for now. But a small non-GAAP fourth-quarter EPS of just $0.02 is nothing compared to Twitter's $55.30 share price, so high levels of growth, both at the top and bottom line, will need to be sustained for a very long time.

Investors are also concerned revenue growth could decelerate if user growth deceleration persists. Per the company's annual report, the cost of advertising on Twitter fell 18% for the seventh straight quarter of sequential declines in the last three months of 2013. Though ad engagement was up 74% sequentially, Twitter's most recent 10-K filing says that that one of the primary factors driving engagement is monthly active user growth, which slowed considerably in the fourth quarter. Sequential growth in monthly active users was 3.9%, down from 6.4% growth in Q3.

Twitter warns investors of the perils of decelerating user growth in its 10-K:

In the event that cost per ad engagement continues to decline, and we are unable to continue to offset the impact of such decreases on advertising revenue by increasing the number of ad engagements, our advertising revenue would decline.

Video ads, however, may help Twitter dampen the effects of slowing user growth.

The takeaway for investors is that video ads could be a major boon for the company. While the valuation is still a bit too aggressive for me to justify, the hope of lucrative videos ads makes this growth stock worth holding.

Looking for growth stocks?
They said it couldn't be done. But David Gardner has proved them wrong time, and time, and time again with stock returns like 926%, 2,239%, and 4,371%. In fact, just recently one of his favorite stocks became a 100-bagger. And he's ready to do it again. You can uncover his scientific approach to crushing the market and his carefully chosen six picks for ultimate growth instantly, because he's making this premium report free for you today. Click here now for access.

Daniel Sparks has no position in any stocks mentioned. The Motley Fool recommends Twitter. It recommends and owns shares of Facebook and Google. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

©1995-2014 The Motley Fool. All rights reserved. | Privacy/Legal Information

Compare Brokers