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How Twitter Inc. Might Come Back From the Dead

By Leo Sun - Updated Jul 6, 2017 at 3:44PM

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Twitter remains 30% below its IPO price, but it could be revived in four ways.

I've been bearish on Twitter (TWTR 3.74%) for four simple reasons: its mediocre user growth, declining ad revenues, lack of profits, and ongoing executive exodus. I examined those weaknesses many times before, but I spent far less time discussing the ways that Twitter could bounce back. Today, we'll take a look at four ways that Twitter -- which remains 30% below its IPO price -- might come back from the dead.

1. Hit the road, Jack...

When co-founder and former CEO Jack Dorsey returned to lead Twitter in late 2015, some investors believed that he could get the company back on track. However, Dorsey didn't relinquish his CEO job at online payments company Square (SQ 9.50%) -- which he also co-founded -- and he's split his time between both companies.

A group of zombies emerges.

Source: Getty.

Dorsey's initial plan to fix Twitter was "Moments", a tab which reduced the social clutter with curated topics. However, the product was quickly overshadowed by Snap's Snapchat Stories and Facebook's (META 5.82%) Instagram Stories, which both pulled away potential advertisers.

Dorsey then announced several rounds of layoffs and tried to sell the company -- which didn't raise much confidence in Twitter's long-term future. The turnaround hasn't materialized as Dorsey's split his time between Twitter and Square, leading many to wonder if the company might be better run by a CEO whose sole focus is the social media company. 

2. It stops lowering its ad prices

Twitter's ad revenues have fallen year-over-year for two straight quarters, even as its monthly active user (MAU) count rose. That's due to Twitter lowering its ad prices (by 60% year-over-year last quarter) in a bid to win back customers.

During last quarter's conference call, CFO Anthony Noto claimed that offering lower prices would help Twitter win over advertisers with "improved ROI." The ROI for advertisers obviously improves as Twitter lowers its ad prices, but its total ad revenues will keep falling if it can't offset those discounts with new ad buys. By comparison, Facebook limits the number of ads it can display to drive up ad prices -- and that strategy lifted its ad revenues by 51% last quarter.

Meanwhile, Twitter's controversial reputation as a river of cyberbullying and propaganda is likely keeping advertisers away. Therefore, Twitter shouldn't be lowering its ad prices (which will become tough to raise again) -- it should be developing better ad products, luring back active users, and filtering the more controversial aspects of its social network.

3. It follows Weibo's lead

Twitter was recently eclipsed by Weibo, sometimes called the "Chinese Twitter," in terms of MAU growth. Weibo's MAUs rose 30% annually to 340 million last quarter. Twitter's MAUs grew just 6% to 328 million.

Weibo's mobile app.

Weibo's mobile app. Source: Google Play.

Weibo's advertising revenue surged 71% last quarter, while Twitter's fell 11%. To top it off, Weibo is profitable by both GAAP and non-GAAP metrics, while Twitter is only profitable on a non-GAAP basis. Therefore, it wouldn't hurt for Twitter to borrow a few plays from Weibo's playbook.

For example, Weibo monetized live videos by letting viewers buy virtual gifts for their favorite broadcasters. It removed its Twitter-like 140-character limit, and added categorized discussion topics like Reddit. It added inline comments like Facebook, which made replying less chaotic than Twitter's stream of "@" comments.

Weibo also integrates itself into SINA's news portal and Alibaba's e-commerce ecosystem to widen its moat against potential competitors. If Twitter follows Weibo's lead with similar changes, it could finally start swimming forward again, instead of treading water with the same old ideas.

4. It slashes its stock bonuses

Twitter isn't profitable on a GAAP basis due to its stock-based compensation (SBC) expenses. Its SBC expenses decline 22% annually to $117 million last quarter, thanks to its recent layoffs, but still ate up 21% of the company's revenue.

SBC expenses are excluded from Twitter's non-GAAP numbers, but they're a real expense that throttles its cash flow. Dorsey juiced up Twitter's free cash flow over the past year by cutting jobs and selling non-core businesses, but those are merely temporary solutions. If Twitter reduces those stock bonuses to reasonable levels to inch toward GAAP profitability, investors might grow more optimistic about its long-term prospects.

But I'm staying bearish (for now)

These four catalysts could lift Twitter's stock price, but I don't see any of these things happening anytime soon. Dorsey can't be easily replaced, ad prices are hard to raise once they've been lowered, and Twitter's likely too proud to start copying features from its "Chinese clone".

Slashing stock bonuses could also be problematic as the company is based in the Bay Area, where firms fiercely compete for talent.

Therefore, Twitter could eventually come back from the dead, but there are plenty of better ways to invest in the social media industry for now.

Leo Sun owns shares of Sina. The Motley Fool owns shares of and recommends Facebook and Twitter. The Motley Fool recommends Sina. The Motley Fool has a disclosure policy.

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