The Metric That Really Matters for Twitter

It's been a pretty tough year so far for social media stocks, namely Twitter (NYSE: TWTR  ) . After a successful initial public offering, shares rose past $70 before beginning their descent in 2014 back to reality. But Twitter hasn't even been public for a full year yet. Surely, we can't know the full story yet, can we?

Nothing to see here
The feeling I get from many in the financial media is that Twitter may very well be a broken story. That the growth is already slowing down and it's only a matter of time before this thing is done. Now, I'll be the first to admit that anything is possible and this very well could be. But after going through its most recent quarterly results, I'm encouraged about where this business is going.

Twitter's most recent quarter was a success by virtually every metric. The company grew users, timeline views, ad revenue per 1,000 timeline views, and total volume of ads. But for a while now, Twitter seems to have been in a battle between expectations and reality. Now it seems the two are coming back together and the expectations seem at least a bit more realistic.

Metrics that matter
The metric that will continue to garner the most headlines during Twitter's earnings will undoubtedly be monthly active users. Even Twitter CEO Dick Costolo stated that content creators care about two things: scale and engagement. But over the coming quarters I'm going to be particularly focused on U.S. monthly active users.

I may be in the minority, but I'm not worried about Twitter's monthly active user growth. It's not Facebook, of course, (yet) with its billion-plus monthly active users. But excuse the golf analogy, comparing Twitter to Facebook is akin to comparing a driver to a putter. They simply do two different things and it's pretty nice to have them both.

Making money
Twitter makes its money through advertising, presented as ad revenue per 1,000 timeline views. So we want to see more users with more timeline views bringing in more ad dollars. For its most recent quarter, ad revenue per 1,000 timeline views came in at $1.44, up 96% from a year ago. The interesting thing is that the U.S. came in at $3.47 up 78%; international came in at $0.61, up 152%.

The breakdown of Twitter's monthly active users today is 198 million international but only 57 million in the U.S. Now, on the one hand, you could say international is a much bigger market opportunity, and in the grand scheme of things, maybe it is. But over the course of the next five to 10 years, management knows that the U.S. opportunity is the one that stands to pay off big-time.

Essentially, 40% of the almost $140 billion in global digital ad dollars that will be spent this year will come from North America and the overwhelming majority of that will come from the U.S. In 2018, it's projected to be more than 40%. As it stands, Twitter represents just a drop in the overall ad dollar bucket today with less than 3% global share. But growing U.S. active users will certainly change that. The slides below from the company's recent earnings presentation show just how Twitter's timeline views and ad dollars break down over the past couple of years:

Source: Twitter

The Foolish bottom line
So does this mean it's go time for investors looking to get in on Twitter? Well, you're going to have to make up your own mind on that. But I sure do think it's worth a look. There isn't a business out there shaping the second screen phenomenon better right now than Twitter and I think that's going to continue. And where the eyeballs go, the ad dollars will follow. So make sure to invest your dollars accordingly. 

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