The Bull Case for Twitter Is Making More Sense Now

For years, investors who were of a mind to be bearish about Twitter (TWTR) might list a number of reasons why -- but high on any such list would have to be these two: First, management was having trouble monetizing its user base; and second, it was clear that there were many, many fake user accounts, bot armies, and malefactors on the platform, but the company couldn't define the scale of those problems, nor were there plans to solve them.

Fast-forward to Tuesday, when Wall Street learned that Twitter's first-quarter 2019 revenue was up 18% year over year, and its daily user count had grown for the first time in a year -- in part due to the fact that the company has largely completed its long purge of fake and malicious accounts. Wall Street applauded in the only way that it knows how to -- by enthusiastically boosting the stock price. In this segment from MarketFoolery, host Chris Hill and Motley Fool Asset Management's Bill Barker discuss what Twitter is doing right, the addictive nature of its product, and more.

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. A full transcript follows the video.

This video was recorded on April 23, 2019.

Chris Hill: We're going to start with social media. Twitter's first-quarter revenue was up 20%, compared to a year ago. The stock is having a monster day. Shares of Twitter up 16%. Was it that good?

Bill Barker: It was a good report. It's interesting, the way they started out their announcement, which was to talk about how effective they are at getting the wrong people or the wrong bots off of their service. You don't normally see the initial quote from the CEO being about, "We're reducing the bad part of the business." But that is a big part of the questions that would be hang out about them. So before even getting into the numbers, the narrative was the first thing that management focused on. The market seems to be liking that. I think that's part of it.

Hill: It's an interesting point. You're right, this is one of those businesses that, for the longest time, that it's been a public company, we've focused on growth, we've focused on their monthly active users, etc., that sort of thing. But as you said, the narrative around -- and it's not just Twitter, but I would argue social media in general, certainly Facebook being the classic case -- part of the narrative for them is, they've got some bad actors on there. If they can clean up this platform, and get rid of the bad actors, then yeah, it's going to be a more valuable business and therefore one worth owning.

Barker: Yeah. I think that it has, for a long time, been a business that, they've got many of the attributes that you would want, and they hadn't been monetizing them as well as the competition. But they have something in their arsenal which is extremely effective, which is a product which is addictive. If you only were to invest in addictive products over the course of your lifetime, you would do very well.

Hill: Yeah, that's true.

Barker: Whether it's tobacco, for whatever you think about tobacco, and probably you should think the very worst things about it. I apologize to all the smokers out there. But it's an addictive product. No matter how much we as a society try to educate ourselves about the downside of that product, it remains an extremely, extremely good investment. We've got some addictive products in front of us right now. Much better than tobacco.

Hill: Yes. It's coffee, and it's both addictive and incredibly healthy. Incredibly good for you.

Barker: Oh, yeah, yeah.

Hill: Unlike, arguably, social media.

Barker: But that's one of the reasons why it is so great. It's not just that coffee is great for you, but your body craves it. But unlike many other things which are great for you -- I've heard this claimed about vegetables, but they are not addictive.

Hill: Not really.

Barker: Somebody needs to work on that, getting a little bit of addictive substance into vegetables.

Hill: All kidding aside, the idea of --

Barker: Do you think I'm kidding?

Hill: [laughs] I don't think you're kidding. I think you're being a little frivolous.

Barker: Somebody's going to work on this.

Hill: I was just going to say, it would be interesting to come up with a list of...forget stock performance, let's just come up with a list of things that are addictive and back-check against the stock performance. And it's like, oh, social media can be addictive. Tobacco is addictive. So is coffee.

Barker: Right. Social media, Facebook and Twitter and some other things, work on magnifying the addictive properties of their product. This is beginning to attract attention and backlash. Twitter, understandably, is starting its quarter by saying, "We're working on the bad side." They're not addressing the addiction problem, which they probably don't see as a problem. But, the downside of the users of platform harming other users. At the same time, I don't think that they're pulling back on the notifications and the things that addict one to social media.

Hill: No, I don't think they are. But I also think in the case of Twitter, it makes inherently good business sense to -- as you said, the opening statement from Jack Dorsey -- to get rid of the bad actors. They're in the business of advertising. The more comfort that advertisers feel spending money on your platform, then the more likely they are to come back and spend more money in the future. It's a very smart move by them.

Barker: Yeah. To go to the actual numbers, which we haven't gotten to yet, basically, business was up about 11% year over year. That's at the top line, that's the users. Really, they did much better than that when you get down to the bottom line in terms of the actual profits, which were ahead well beyond that.