Sheryl Sandberg. Source: Wikimedia Commons.
When Facebook (META -3.75%) hired Sheryl Sandberg as its chief operating officer, her apparent job description was important, but simple: Be the adult -- make us money. By having a background growing Google's online sales channels, she was a perfect fit to help Facebook monetize its impressive user base. Facebook CEO Mark Zuckerberg commented on Ms. Sandberg at that time: "She has just about the most relevant industry experience for Facebook, especially since we need to scale our operations and scale them globally."
Ms. Sandberg arrived to find a company with a problem: Although it had tremendous user growth, it had no clear plan to financially benefit from from it. A Bloomberg Businessweek article recounts Ms. Sandberg's prescription: "The possibilities, she recalls, boiled down to two categories -- making users pay or making advertisers pay. Employees quickly agreed with her that the latter was far more appealing."
The change wasn't accepted by everybody -- some high-profile executives left -- and the company had bumps along the way, but now Facebook has provided a post-IPO return of more than 110%. And right now, Twitter (TWTR) is in desperate need of its own Sheryl Sandberg.
A tale of two social media companies
Many of Facebook's bumps occurred quickly after the initial public offering. Flawed execution on behalf of Nasdaq essentially ended Facebook's honeymoon period and forced the company to confront analyst concerns, including mobile monetization, rather quickly in the middle of negative news coverage.
Meanwhile, microblogging site Twitter was also prepping for its IPO. And at that time, the zeitgeist was the exact opposite for Twitter; the company seemed to excel where Facebook struggled. Strong mobile presence, check. A sympathetic media, check. And eventually, a successful IPO, check.
Twitter's IPO was the exact opposite of Facebook's poor showing, where underwriter Morgan Stanley had to step in to support Facebook's price. Twitter rocketed up 73% on its first day, going from its IPO price of $26 per share to close at $44.90 per share. If you had followed the crowd that day into Twitter -- and not Facebook -- you'd actually be down on your investment, and would have missed a tremendous run for Facebook. The chart below provides proper context amid the backdrop of the greater S&P 500 index:
So what happened?
As you can see, Twitter started off well... so what happened? On fundamentals, the story centers on slowing user growth. But more broadly, the company seems to be facing an existential crisis much like Facebook had when it hired Sheryl Sandberg. In this case, the focus is less on user monetization, and more on how to grow members and timeline views.
Last quarter, the company tumbled after announcing an additional 13 million active users, a 5% increase, bringing its total to 284 million worldwide active users. However, when it comes to timeline views, the monthly active user reported a decrease of 7% when compared to last quarter's results.
Slowing monthly active user growth and decreases in monthly active user timeline views are concerning for a company that has reported a cumulative net loss of $452 million through the first three quarters of 2014. However, that figure includes an expensed $454 million in stock compensation expenses, and cash flow from operations (ex-stock compensation) of $38 million.
What do you want to be when you grow up, Twitter?
The question for Twitter is how to best position its service to grow its user base. The company deftly beat Facebook for "second screen" dominance, even partnering with Nielsen Twitter TV Rankings, so it has won battles against its bigger rival. Not sure if this has been the game changer the company envisioned, but it was an incredible accomplishment.
Twitter is having problems solving its version of the friend paradox that should be more aptly termed the follower paradox. In addition to finding the service hard to navigate, it's hard for many new users to acquire significant followers. In the end, the service is set up like a cruel version of a high-school lunchroom, with power users being the "in crowd" unconcerned with following the new freshmen.
A Deutsche Bank study found that 60% of those who left Twitter did so with less than 10 followers, while only 5% did so with more than 100 followers. Twitter has tried to make the new user experience better by a detailed onboarding process, but it doesn't address the follower issue well.
Peter Thiel thinks Twitter's smoking too much pot; they just need a Sandberg
The company now finds itself trading below its market capitalization on the close of its amazing IPO; the company closed that day valued at $24 billion, but is now worth $23 billion. Adding insult to injury, a new Citigroup valuation finds that Instagram -- a Facebook-owned entity -- is worth $35 billion on its own.
Famed investor Peter Thiel once commented on Twitter's "horrible mismanagement" by stating they "probably" smoke too much pot. I'll leave the rhetorical flourishes to Mr. Thiel, but we both agree that, long term, this is an inherently valuable franchise. The question for Dick Costolo is, "Can you find an adult to extract that value?" Anybody know the next Sheryl Sandberg?
