Please ensure Javascript is enabled for purposes of website accessibility

Forget TikTok: Twitter Is the Social Media Company to Watch Right Now

By Billy Duberstein - Sep 10, 2020 at 6:00AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Twitter is one of the lower-valued social media stocks, but there's a lot going on under the hood.

Much recent social media stock news has centered around TikTok, the hit short video app from Chinese company ByteDance. That's no surprise; its potential acquisition by a large U.S. technology company may occur in the coming days, and it's been at the center of the U.S.-China trade war.

You and I won't be able to purchase TikTok outright. Still, there's a lot going on in the social media world. The COVID-19 pandemic has led to an interesting dynamic in which usage of social media has skyrocketed, but advertising revenue, which is how most social media networks make money, is way down.

One of the more interesting companies at the center of these crosscurrents is Twitter (TWTR -0.30%).

A person holds a smartphone with a trailing cloud of emoji floating above it.

Image source: Getty Images.

Improving the experience and growing users

One of the conundrums of the social media world is that Twitter has never really made any big profits during its time as a public company, at least compared to others. Although fellow social media rival Facebook (META -0.11%) has been a cash flow machine in its time as a public company, Twitter has had relatively low earnings, and last quarter even had a slight operating loss.

TWTR Operating Income (Quarterly) Chart

TWTR Operating Income (Quarterly) data by YCharts

Facebook has been able to spread internationally and monetize its vast user base, while Twitter has generally struggled to reach critical mass.

However, recent events at Twitter may point to a potential turnaround, should the advertising environment continue to improve.

Accelerating usage and a new ad server

Though the overall advertising environment has deteriorated this year,  two drivers of Twitter's future revenue -- its monetizable daily user numbers and its advertising technology -- each improved last quarter.

Twitter's mDAU count grew 34% last quarter to 186 million, marking a big acceleration over the prior quarter's 24% growth and the year-ago quarter's 14% growth. Some of that was certainly due to lockdowns and people engaging with Twitter for COVID-19 updates, but management thinks Twitter's product improvements in matching users with appropriate topics over the past year have also contributed to the usage uptick. 

Second, Twitter has just completed an overhaul of its ad server. This project was a year and a half in the making and took a lot of internal effort, slowing down Twitter's rollout of new features. Now that the architectural reboot is behind the company, look for Twitter to more efficiently serve more diverse ads going forward.

Twitter also recently purchased a company called CrossInstall, which specializes in mobile ad-buying for video game businesses. Twitter hopes to fold CrossInstall into its mobile app promotion tools and increase the effectiveness of its direct response ads, where it has lagged behind other large social media companies.

Finally, and perhaps most intriguing, a job posting earlier this summer hinted that Twitter's looking to create one or more subscription-based products. That piqued a lot of interest, as subscription-based businesses are now coveted by investors during this year's advertising slump. When asked about this on a recent conference call with analysts, CEO Jack Dorsey only said:

As you mentioned, there have been a number of ideas over the years. We have focused the majority of our attention on increasing revenue durability, meaning that we have multiple lines of revenue to pull from. But most importantly, we want to make sure that any new line of revenue is complementary to our advertising business. We do think there is a world where subscription is complementary. We think there is a world where commerce is complementary. You can imagine work around helping people manage paywalls as well that we believe is complementary. So that's what we're looking for. We have a -- we have a small team exploring our options; obviously we're hiring for those teams.

That sounds a bit noncommittal, and we probably won't see an ad-free subscription version of Twitter anytime soon. Still, the idea that Twitter may attempt to leverage its user base to get into e-commerce or site management is an intriguing prospect for investors to monitor. 

Why I'm not in yet

Twitter is definitely a stock I'll be monitoring, but I'm still on the sidelines for now. There are also a few risks right now with Twitter, even outside of advertising industry headwinds.

For one, Twitter suffered a public cybersecurity hack back in July. While the hack only happened to a few high-profile celebrity accounts, it was an embarrassing mistake, and it's too soon to tell if the hack will impede mDAU growth.

Twitter also didn't repurchase any shares in the last quarter, which is understandable considering the high market uncertainty. However, the company received funding from private equity firm Silver Lake Partners just before the pandemic broke out specifically to buy back stock. Activist investor Elliott Management is also involved. Like the rest of the market, Twitter's stock is much higher today than the depths of March or April, so not seeing any repurchases last quarter was a bit disappointing.

Twitter is cheap, sort of, relatively speaking

Twitter's current market capitalization is currently $30 billion or so. That may seem like a lot compared with its mere $366 million in operating income last year, but if you think about a rival social media like Facebook, which has a market cap of $770 billion, you have to think Twitter can do better at improving its financials going forward.

The presence of an engaged activist investor is encouraging, and Twitter's relatively low market cap for the space makes its technology overhaul and mDAU growth intriguing. While the TikTok saga is probably more entertaining to follow, a turnaround a Twitter is potentially more exciting for investors, especially as we enter a highly engaged political season.

Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to its CEO, Mark Zuckerberg, is a member of The Motley Fool's board of directors. Billy Duberstein owns shares of Facebook. His clients may own shares of the companies mentioned. The Motley Fool owns shares of and recommends Facebook and Twitter. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Twitter, Inc. Stock Quote
Twitter, Inc.
$43.86 (-0.30%) $0.13
Meta Platforms, Inc. Stock Quote
Meta Platforms, Inc.
$174.66 (-0.11%) $0.19

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 08/18/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.