The recent hiring of a rock star Wall Street banker as the new CFO of Twitter (NYSE:TWTR) has investors buzzing about the company. After a rough spring that saw the stock collapse to lows around $30 following the IPO ramp to $75, Twitter finally stabilized and gained some legs in the market. On top of the big hire, Twitter also continued its spree of buying up mobile advertising firms, including the recent purchase of TapCommerce.
Social media companies that started off as free-to-use services without advertising face a major dilemma: how to appropriately monetize user traffic without alienating the user base. Facebook (NASDAQ:FB) dealt with these issues, and as a result the company made a recent move to purchase an advertising technology firm in order to improve ads on the site. But the ultimate question is whether these social media giants are doing enough to attract users with site enhancements focused on advertising efforts.
Is advertising technology enough?
Facebook has done an excellent job in the last year of improving the monetization of its existing user base while the growth rates for the high volume North American user base slow. The stock jumped to record highs after reporting that second quarter average revenue per user, or ARPU, jumped 40% year over year to reach $2.24.
With lower monetization rates at Twitter, the company is making a push into advertising technology by adding TapCommerce. TapCommerce provides a mobile retargeting and reengagement advertising platform that incorporates real-time programmatic buying. Combined with the MoPub acquisition last year and other capabilities built internally, Twitter now claims it has the ability to drive conversions with mobile consumers for advertisers on and off Twitter and across the full user lifecycle -- from new users via app installs to reengaging existing users.
The interesting part is that TapCommerce enables real-time programmatic mobile ad buying across multiple exchanges in over 50,000 apps. This is similar to the deal Facebook made to purchase video ad firm LiveRail. But will advertising clients want to use an advertising service owned by a website that in turn competes for advertising dollars and user attention?
Need to solve user growth
The ability to obtain more revenue from existing users will make Facebook and Twitter more money, but the longevity of the related services is tied more into the user experience. As social networks, both companies -- especially Twitter -- need to expand their user bases to ensure their continued relevancy.
For the first quarter, Twitter reported a total of 255 million monthly users, or MAUs, compared to 1.2 billion MAUs for Facebook. What's concerning for Twitter is that the user base is only growing around 25% annually. For Facebook, total revenue growth remains solid, but overall growth in the developed world has slowed to a crawl.
At this point, the key for Facebook is whether it can keep users entertained as its network appeal stalls and teens look elsewhere. Twitter, on the other hand, is still relatively new and the user base remains small compared to Facebook.
Purchasing a mobile retargeting firm and hiring a high-profile CFO are headline-grabbing deals and probably necessary for the long-term success of Twitter, but what the stock really needs is an innovative breakthrough that will stimulate accelerated user growth. In order for the stock, with a current valuation of $22 billion, to obtain a leg up in valuation and reach the $50 billion or even $100 billion range that Facebook has already cruised past, Twitter needs products not ad tools. The second quarter 2014 earnings report might focus on the new CFO, but any stock gains will require an acceleration in the user base growth rate beyond 25%.
Mark Holder has no position in any stocks mentioned. The Motley Fool recommends Facebook and Twitter. 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.