Twitter (TWTR) is a peculiar stock. Shares have traded at or below the company's IPO price for the majority of its existence as a public company. However, that changed in 2020, with shares up over 150% to $68.10 a share, close to the all-time high set all the way back in 2014. With activist investor Elliot Management joining Twitter's board of directors and many new products coming down the pipeline, investor sentiment has turned from negative to positive on Twitter in recent months.
But is this positivity warranted? Let's take a look.
At Twitter's analyst event on Feb. 25, CEO Jack Dorsey and other executives outlined the new products coming to the Twitter platform. One product, dubbed "Super Follows," will allow users to charge followers for exclusive content like community discussions, bonus tweets, product deals, or even as a form of tipping in appreciation for their work. Twitter also acquired Revue, a newsletter platform similar to Substack, as another subscription tool for writers and creators to make money through the platform.
On other fronts, the company is building a Communities product centered around certain topics and interests, similar to Facebook Groups. But the most important new product might be Twitter Spaces, the company's new live audio discussion product.
Similar to the start-up Clubhouse, Twitter Spaces allows users to start, listen in on, and join conversations with any other Twitter user. There is a lot of excitement around the product, which is currently only available to a few users, as it could bring Twitter outside of the written word and into a whole new social media category.
Dorsey summed up his vision for the future of all these products at the analyst day: "It's easy to imagine starting with a tweet, moving a conversation to real-time audio and then recapping the conversation with long-form text."
A big problem with Twitter over the years has been inconsistent user growth. However, over the last few quarters, there are indications this is changing for the better. Twitter had 192 million monetizable daily active users (mDAUs) in the fourth quarter of last year, up 27% from Q4 in 2019, which saw mDAU growth of only 21%. If you look over the last few years, Twitter has gone from growing mDAUs at a 10% to 20% annual rate to 20% to 30% or higher in recent quarters.
With a market cap of $54.2 billion, Twitter currently trades at a price-to-sales ratio (P/S) of around 14.6. It was unprofitable in 2020 but did generate $993 million in operating cash flow, which would give it a price-to-operating-cash-flow ratio (P/OCF) of 54.6. Both these valuation multiples are above the market average. However, with Twitter's progress on new ad formats like Mobile Application Programming (MAP) growing 50% year over year in Q4, it looks like the valuation could come down rather quickly.
Twitter advertisements are notoriously bad compared to Facebook and Alphabet's Google, so if it can improve its advertising in any way, profitability could grow substantially in the coming years. Management still has to execute, though.
At Twitter's analyst day, the company stated that it has a goal of hitting 315 million mDAUs and doubling revenue to $7.5 billion in 2023. Investors should keep these numbers in mind when evaluating Twitter's execution over the next few years.
When looking at the combination of new product launches and acceleration of user growth, I think it is clear that Twitter has gotten its groove back. Yes, the ad platform and valuation leave some things to be desired, but if you believe the company can hit its 2023 user and revenue targets, an investment in Twitter at these prices could be a smart move.