I went on record saying Twitter (TWTR -0.16%) will be a multibagger for investors. Yes, the company is still very young, but it has become such an important communication platform. More than 230 million monthly active users generate more than 500 million Tweets per day, and those numbers will continue to rise as more people join and use the service. But there's more to the company than just user and engagement growth. It has the staying power to become a phenomenal investment over the next five years. Here are the three reasons why I own shares of Twitter and why I think you should, too.
1. Twitter is whatever you make it.
Setting up a Twitter account is very easy, but new users are faced with a dilemma right from the beginning: What do I do? Some will say that the "blank canvas" users see at the beginning is a problem. Tech analyst and blogger Benedict Evans notes it's actually a huge opportunity, and I agree.
From the blank canvas of a new Timeline, where all the action on Twitter takes places, users can form Twitter into whatever they want it to be. You are the curator and the creator of whatever you find interesting. Sure, it takes a little work at the beginning. But whether you're a foodie or a football fanatic, there's plenty of people to follow and converse with on Twitter.
Evans sums up part of Twitter's competitive advantage by saying: "But once you've build up a twitter feed around your interests, and a global network of people you've never actually met that you talk to, that's hard to replicate elsewhere."
"Hard to replicate" is music to investors' ears, as the phrase usually brings sustained revenue and cash flow growth.
2. Twitter has incredible data.
140 characters may seem trivial by itself, but when multiplied by hundreds of millions of users per month, they create an incredible set of data for Twitter to use. Each tweet contains metadata and contextual data. Metadata is very basic information, such as who created the tweet, when they created it, and from where. Twitter also knows who favorited the tweet and/or who retweeted it, along with 26 other pieces of information attached to each tweet.
What brings the metadata to life is the contextual data, or what the user discussed in the tweet. As a huge fan of Arsenal, I can cheer the team on during a soccer match or make a comment about one of my favorite players. As a consumer, maybe I would like to brag about my new Nike Free Trainer 5.0 shoes. And as an analyst, I can share thoughts about companies and stocks I find interesting.
From the two sets of data, Twitter creates a powerful concoction knowns as the Interest Graph. The company builds an Interest Graph for each user and can update its information in real-time based on the topics of conversation. Imagine knowing what millions and millions of people all around the world are interested in at any particular moment in time. Who might pay for information like that?
3. Advertisers are flocking to Twitter.
Yes, it's advertisers who would pay to get their messages in front of Twitter's users. And they are flocking to Twitter, especially on mobile devices. Twitter generated $317 million in revenue last year, and analysts expect sales to finish 2013 100% higher at $640 million.
Those same analysts see revenue increasing to over $5 billion in 2018. That's quite an estimate, but my opinion is that it will likely be on the low side. I expect the volume of ads to increase significantly over the next five years. More important, I see prices for ads rising, too. As marketers find ads on Twitter more effective, they will allocate more dollars Twitter's way. It's a simple investment thesis for them: Allocate capital to the highest returns.
The Foolish bottom line
I plan to own my shares of Twitter for a long time. It is an incredibly simple, versatile, and yet powerful platform that's changing the way people around the world communicate with each other. And every Tweet adds incremental value to Twitter's database, which is exactly what advertisers want to see. I can't wait to earn those multibagger returns in my portfolio, and I hope you do, too.