3 Reasons to Buy Twitter

Twitter's big drop in price makes it much more attractive than it was at $75. Twitter will not be the next Facebook, but it is a great niche service.

May 19, 2014 at 5:00PM

After a big price drop for Twitter (NYSE:TWTR) its valuation seems a lot more earthly (and yet still not cheap). The company's lack of user growth has confirmed the hypothesis of many investors and analysts who have previously stated that Twitter will never be Facebook (NASDAQ:FB).

Twitter remains a niche product for certain types of social-media savvy users. It is not mainstream like Facebook is, and it also does not own highly valuable social-media and communications properties like Instagram, WhatsApp, Oculus, etc. The big correction in Twitter's stock price from the mid-70s, coupled with some improving trends in its monetization, could lead to a more realistic investment case for Twitter. 

Robust growth in monetization
Twitter remains an advertising-centered company, just like other social-media names such as Facebook and Yelp. Advertising revenue made up roughly 90% of Twitter's revenue in the last quarter. The company's ad revenue per thousand timeline views grew to $1.44 for a healthy increase of 95% on a year-over-year basis from $0.74. 

Twitter's quarterly average revenue per user, or ARPU, stood at close to $1 per user. Going forward, higher ad loads in its platform will enable the company to ramp up this number a lot. Twitter is adopting Facebook's playbook of focusing on the user experience first and then focusing on ad placements. Facebook has substantially increased the ad load on its platform in the last few quarters, but Twitter still has a very low ad load and can increase the number of ads portrayed on user timelines substantially in the future. 

Rising margins
Twitter anticipates full-year 2014 revenue of $1.20 billion-$1.25 billion, which is a $50 million increase in revenue guidance from the estimate laid out in the prior quarter. It expects adjusted EBITDA in the range of $180 million-$205 million, and stock-based compensation for 2014 of $640 million-$690 million. 

The company's CFO stated on the earnings call that roughly $500 million of the stock compensation was driven by stock grants and a small portion resulted from acquisitions. Twitter had to expense many pre-IPO stock grants to employees in 2013, and this will continue into 2014 and thus create the illusion of low profit margins.

When Facebook went public, the social media company also saw its operating margins compress in the near-term, only to rise back to pre-IPO levels of 43%-44% in the last two quarters. So Twitter should see its margins rise dramatically as the company sees strong revenue growth and its stock compensation plans go back to a more normalized trend. 

Ad placements can increase substantially
In the last quarter, Twitter saw its cost per ad go down 20% from the prior quarter, but a 28% increase in total ad engagements offset this price decrease. The company has improved user targeting, and that should drive demand from advertisers going forward. 

Due to the conversational nature of Twitter, the company's TV product suite could gain a lot of momentum. Twitter allows advertisers to target their ads by using keywords, live events, etc., and this could drive a lot of value for media and broadcast companies across the globe. In addition, higher-quality ads on the platform will enable the company to increase the ad revenue per timeline view.

In addition, Twitter is ramping up its offerings to small and medium-sized businesses, or SMBs, by allowing them to place ads through a self-serve platform. These initiatives will enable the company to not only attract newer ad clients, but also get existing marketers to increase their ad budgets on Twitter. 

Going forward
Even though Twitter saw a decline in user engagement, the total number of views on its platform did see a material increase, and the company's decision to increase its revenue and EBITDA estimates for 2014 remains a strong positive. The company's high-flying stock has rewarded speculative traders who managed to sell their positions at the highs. However, with improving fundamentals and a much more attractive stock price, longer-term investors will start taking more serious looks at Twitter.

Twitter's engagement as measured by retweets and favorites increased 26% in the last quarter, which is a notable positive. If the company can show marketers higher ROIs, newer clients will flock to the company's platform. Improved investor sentiment and monetization will drive upside in Twitter's stock price. 

Your credit card may soon be completely worthless
The plastic in your wallet is about to go the way of the typewriter, the VCR, and the 8-track tape player. When it does, a handful of investors could stand to get very rich. You can join them -- but you must act now. An eye-opening new presentation reveals the full story on why your credit card is about to be worthless -- and highlights one little-known company sitting at the epicenter of an earth-shaking movement that could hand early investors the kind of profits we haven't seen since the dot-com days. Click here to watch this stunning video.


Ishfaque Faruk has no position in any stocks mentioned. The Motley Fool recommends Facebook, Twitter, and Yelp. The Motley Fool owns shares of Facebook. 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.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at www.fool.com/podcasts.

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to www.fool.com/podcasts, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.


Compare Brokers