"Knowledge is power."
That's the value proposition for Twitter's (NYSE:TWTR) small side business, often referred to as the firehose. Twitter's firehose may presently account for a very small portion of Twitter's revenue, but it also could be more valuable than investors realize.
Twitter's side gig
It's small at about 11% of trailing-12-month revenue -- but large enough to intrigue investors.
So... what is this firehose? It's Twitter's data-licensing business, where it sells access to historical and real-time public data. In other words, it's a goldmine of users' tweets and the data the tweets contain.
At first glimpse, it might be easy for investors to write data licensing off as unimportant -- especially since it is shrinking as a percentage of total revenue. They could very well be right. Even Twitter believes that data-licensing revenue will continue to decrease as a percentage of total revenue overtime.
But what if Twitter is underestimating the potential of this side gig? Consider this: just five of Twitter's data-licensing clients accounted for about 73% of total data-licensing revenue and 8% of Twitter's total revenue. If the data in Twitter's firehose became more valuable over the next few years and just five similar-sized clients wanted to tap into the firehose, Twitter could double its data-licensing revenue in just a few years.
What do clients use the data for? Twitter gives one example in the S-1 filing: "[O]ne of our data partners applies its algorithms to Twitter data to create and sell products to its customers that identify activity trends across Twitter which may be relevant to its customers' investment portfolios." Sounds a bit like StockTwits. Dick's Sporting Goods has used Twitter's firehose to find out why consumers were coming into its stores without buying anything, according to the Mashable. Mashable also cites supermarket chains using the data to "assess the demand for barbecue equipment on a coming weekend." The possibilities are endless.
Opportunity or not?
Since Twitter has specifically said it expects its data-licensing business to decline as a percentage of revenue, it's not a development investors should count on when considering Twitter's growth opportunity. Still, it's worth pondering: Is management underestimating the opportunity here? As Twitter matures, the data will likely mature, too. Would better data spark interest from other large clients? Should this be a business Twitter is focusing on?