Trouble Competing? Twitter's User Base Is Much Smaller Than Expected

Twitter (TWTR) management has had a change of heart. For the last couple years, the company reported growth in daily active users (DAUs), but it refused to report exactly how many users that was.

It finally revealed its DAU number with its fourth-quarter earnings release, and it's a lot smaller than anticipated.

Twitter has 126 million daily active users. That's 60 million fewer than Snap's (SNAP -4.04%) Snapchat, and its 374 million fewer than Instagram Stories. Facebook's (META -4.13%) core platform has over 12 times as many daily users (1.52 billion).

While Twitter's DAUs continue to grow at a healthy pace, the small number of total users ought to concern investors.

Image source: Twitter, copyright Aaron Durand (@everydaydude) for Twitter, Inc.

Smaller than expected

Back in early 2016, analysts estimated Twitter had about 136 million daily active users based on the disclosure that 44% of monthly active users in its top 20 markets signed in daily in the second quarter of 2015. Management noted that ratio remained stable in the second quarter of 2016 when it had 313 million MAUs.

Twitter noted it's only counting the subset of daily users it considers monetizable. It doesn't show ads in third-party applications including TweetDeck, which it owns. Measurements of DAUs before 2016, like the Q2 2015 disclosure, included all daily users.

But to advertisers, monetizable daily users is all that really matters. Twitter argues Snapchat and Facebook inflate daily user numbers by including those that only use the messaging functions of their apps. Despite ignoring that both Snapchat's messaging and Facebook's Messenger are monetized products -- the former with promoted lenses, the latter with more traditional display ads -- Twitter still lags well behind the competition.

Brand advertisers want to reach the widest possible audience with their message per dollar invested. All else being equal, Twitter offers the worst option among the three companies due its relatively small size.

Direct response advertisers want to be able to target ads to effectively reach their target audience. A small user base is also unattractive to those marketers because the smaller amount of targeting data to use a guide makes ads less effective. Additionally, marketers still have to invest in someone to produce a creative campaign that works for that medium, so the up-front creative costs don't go as far if there's a smaller target audience on the platform.

Less potential to improve monetization

Twitter's DAU number enables investors to compare its monetization levels to its competitors. The table below compares the North American average revenue per daily user for 2018 for Twitter, Snapchat, and Facebook. North America is the most mature advertising market for all three companies, so it presents the best comparison across all three platforms.

*U.S. only **U.S. and Canada only. Data sources: Twitter, Snap, Facebook quarterly earnings presentations.

As you can see, Twitter is doing a fairly good job monetizing its user base compared to Snap, but it's still well behind Facebook.

Granted, Facebook's revenue number includes ads on its other properties, but its DAU number doesn't include unique users on Instagram, Messenger, or WhatsApp. Facebook says it will start regularly reporting metrics based on its family of apps in the future instead of focusing on Facebook users. Still, Facebook is monetizing its users at a level well above Twitter.

Twitter CFO Ned Segal says the company is still demand-constrained in its ad business. There are plenty of opportunities for it to show more ads to its users, but it doesn't yet have the demand for those ad impressions. As noted above, Twitter will continue to struggle increasing demand with a relatively small user base.

Check out the latest Twitter earnings call transcript.

More importantly, revealing its small user base indicates Twitter is already monetizing users at a pretty good clip. If it had more users, it would imply even more potential for growth based on current revenue levels.

Twitter's decision to finally reveal its daily active users has some unfortunate implications. Still, it's better than allowing investors to focus on the declining monthly user base. The greater transparency is good for potential investors, but current investors might not be so happy with what the company has to offer.