When Twitter (TWTR) first became a public company back in 2013, I wrote about how it was a worthwhile IPO stock to buy. At the time, I thought it would make investors rich.
Since then, the company's fortunes have not propelled the stock anywhere close to the prices seen around the time of its IPO. Is there hope for the future? Could Twitter be a millionaire maker stock?
Image source: Getty Images.
How Twitter makes money
Twitter generates nearly 90% of its revenue from advertising. In 2019, the company had roughly $3.5 billion in revenue, with nearly $3 billion of that from its ad business.
The good news is that 2019 revenue increased 14% year over year, and its revenue for the quarter ended Dec. 31, 2019, was $1 billion for the first time. In fact, the company's revenue has grown mostly steadily, as seen in this chart.
Data by Ycharts.
The latest growth was fueled by a rise in average monetizable daily active users (mDAU), a metric that measures the number of daily Twitter users to whom the company can show ads. In 2019, mDAU saw a 21% year-over-year increase to 152 million users, the third consecutive year of mDAU growth, and the strongest.
| Year | mDAU at Year's End | Year-over-Year Increase |
|---|---|---|
| 2019 | 152 million | 21% |
| 2018 | 126 million | 9% |
| 2017 | 115 million | 12% |
DATA SOURCE: TWITTER.
The majority of Twitter's mDAUs are international users, with just 31 million users based in the U.S. at the end of 2019, although the U.S. accounted for $509.2 million of the company's $1 billion Q4 revenue.
One way to look at these numbers is to see lots of growth potential given the small percentage of the population actively using Twitter today. But the company was founded in 2006, so it took Twitter 13 years to get to this point. By comparison, Facebook (META -10.56%), founded just two years earlier, boasted an average 1.7 billion daily active users at the end of last year.
Moreover, Twitter's reliance on ad revenue exposes it to the cyclical nature of advertising. When sales drop for businesses, so does advertising spend. The novel coronavirus pandemic illustrates this. With many people forced to remain home and people hungry for information, Twitter usage has increased. Twitter experienced a 23% quarter-to-date increase in mDAU through March 23.
But even with this explosive growth, Twitter withdrew its first-quarter guidance due to the pandemic. When businesses can't generate revenue with consumers stuck at home, they must cut back costs, including advertising spend, which hurts Twitter.
The pandemic will pass and Twitter's revenue will bounce back over time, but the ad industry's cyclical nature means other situations where Twitter's advertisers experience a sales decline, such as in a recession, will lead to decreased revenue for Twitter. If the company could diversify its business to reduce the reliance on advertising, it would be better insulated from these cyclical trends, but it has no plans to do so.
Twitter's areas of focus
Twitter's current priorities focus on improving its tech infrastructure and speed of software development, weeding out "fake news" and other misleading conversations on its platform, repairing software bugs that adversely impact revenue, and building more of a global workforce. While these goals have merit, most involve fixing foundational issues, highlighting challenges in its business. These need to be addressed to set Twitter up for success, but this work must be completed before the company can build upon it to see the kind of user and revenue growth that would allow it to approach Facebook's levels.
Ultimately, the biggest challenge is that Twitter, at its heart, is still a microblogging platform. While other technology companies have extended beyond their core businesses, such as Alphabet's expansion into cloud computing services, Twitter remains largely focused on its microblogging roots.
The verdict
Although Twitter is one of the largest social networks in the world, with steadily increasing users and revenue, it is not in a position today to drive the explosive growth that would fuel a significant rise in its share price. Without that, its stock won't see the kinds of gains necessary to make it a millionaire maker.
When asked about the low adoption in the U.S., Twitter CEO Jack Dorsey admitted during the Q4 earnings call that the company has not given people "enough reason yet to come to the app and utilize it." Therefore, it's not a bad investment to consider given its consistent ability to grow revenue, but it likely won't get you to millionaire status.
