Twitter (TWTR +0.00%) is down almost 50% in 2014 and yet the company still trades at a very high valuation. In a prior article, I laid out a bullish case for Twitter, and now I'd like to make a bear case for the company. The big pullback in technology stocks has hurt a lot of high-quality companies, but there just might be a further price correction before astute long-term investors start taking a more serious look at Twitter.
Niche product
Twitter is a niche product and is unlikely to gain the ubiquity or global acceptance of some of its social media and communications peers like Facebook (FB 1.29%), WhatsApp, or Instagram. Many have talked about the relevancy factor for Twitter, as most users don't know what to do when on Twitter. As a result, some open an account and do not use the site much thereafter.
The recent fall in the stock price was a function of the declining timeline views per monthly active user, or MAU. In the last quarter, timeline views per MAU in the U.S. decreased 3% year over year to 804, and international time views per user stood at 560 a 10% year-over-year decline. If it continues to see lower usage in the future, Twitter will have to deal with material negative impacts on its financials. This is primarily because social media companies are heavily dependent on user eyeballs for generating revenue.
International users made up 78% of Twitter's total customer base, but international revenue made up only 28% of its total revenue. So a large majority of the company's members are not responsible for Twitter's revenue, but sales are flowing in due to highly engaged users in the U.S. Mass-market adoption of Twitter remains a major over-hang for the company.
Engagement and monetization far below Facebook
In the last quarter, Twitter saw its total membership grow 25%, which was down from 30% in the year-ago quarter. The deceleration of user additions has sparked concerns about usage of the micro-blogging service. The number of monthly Twitter users, who frequent the platform daily, was disclosed as being in the high 40s. On a comparative basis, the number of monthly users on Facebook, who access the social media site, stood at 63% in the last quarter, which represents an increase for 7 consecutive quarters for Facebook. In other words, Facebook's user engagement is at all-time highs, whereas Twitter is seeing declines in time-line views per user.
In addition, Twitter's quarterly average revenue per user, or ARPU, is far below Facebook's ARPU as well. Over the trailing twelve months, Twitter's ARPU stood at $3.35, which is well behind Facebook's monetization. In the last twelve months, Facebook earned on average $7.46 per user from its global user base of more than 1.28 billion global subscribers.
In addition, Facebook has a number of untapped drivers. Twitter does have future monetization drivers in the form of data licensing revenue from Gnip and mobile ad exchange revenues from MoPub, but both are not close to making money.
Valuation is still lofty
Twitter remains expensive despite the huge price correction in the stock. Twitter trades at 14.5 times its expected 2014 sales of $1.27 billion. That is a very expensive valuation but investors would be willing to attach a higher multiple to the company's strong revenue growth rate, if Twitter can create a more engaged customer base and increase adoption.
Future growth in users and mainstream adoption of Twitter are major concerns for investors. And if the user engagement statistics of the company fall below investor expectations (in the next few quarters) the stock might see lower lows.
