Peter Thiel is quite outspoken. Source: TechCrunch50-2008
Peter Thiel bought a 10% stake in Facebook (FB +1.33%) in 2004 -- becoming the company's first outside investor -- so take his words about fellow social media company Twitter (TWTR +0.00%) with a grain of salt. "Twitter is hard to evaluate," he told the hosts of CNBC's Squawk Box this week. "It's a horribly mismanaged company -- probably a lot of pot-smoking going on there."
He did concede that there's still "a lot of potential" and "it's such a solid franchise it may even work with all that," but he might have a point. Twitter's user growth has disappointed investors, and its monetization efforts are far from innovative.
But it's not like Twitter doesn't know it has problems. The company is heavily focused on onboarding new users, and newly hired CFO Anthony Noto seems to have at least some good ideas to improve monetization. Management's decision to raise money using debt this month at record low rates is a big opportunity for management to improve its business as well.
Twitter's potential
Thiel told CNBC, "I think [Twitter] should probably be making way more money. ... It feels like it's vastly underperforming its potential."
Twitter's revenue is relatively weak compared to Facebook's. In 2012 -- Facebook's eighth year of existence -- the company brought in over $5 billion in revenue. The current consensus estimate for Twitter's revenue in its eighth year (2014) is just $1.36 billion.
It's worth noting, however, that Twitter's average revenue per user is pretty close to where Facebook was at this point in its life. Last quarter, Twitter brought in $1.15 per user. Facebook brought in $1.28 per user in the second quarter of 2012 -- just 11% more.
The problem is Twitter has just 271 million active users, while Facebook had 955 million two years ago. Dick Costolo, Twitter's CEO, addressed the issue on the company's latest earnings call noting that the platform's actual audience is two-to-three times as big if you count visitors who don't log in. There's a lot of potential in those visitors that Twitter's management has been unable to tap.
New management just getting started
This year has seen a lot of changes at Twitter. Earlier this summer, COO Ali Rowghani resigned after disagreements with Costolo and his inability to spur user growth and innovate the core product. Rowghani had been instrumental in Twitter's IPO and its social television strategy. Twitter's head of North American media, Chloe Sladen, left the same day.
In January, Twitter's product chief, Michael Sippey, departed, and vice president of engineering, Christopher Fry, left in the end of May.
Anthony Noto took over as Twitter's CFO this Summer. Source: TechCrunch
Twitter hired Daniel Graf to replace Sippey. Graf previously oversaw the Google Maps mobile product and served as CEO of the social video platform Kyte prior to that. Another ex-Googler, Alexander Roetter, replaced Fry. Roetter is a founding member of the AdSense team, and has worked at Twitter since 2010.
The most notable hire came when Costolo tapped Anthony Noto to take over the role of CFO. Noto worked at Goldman Sachs, leading the team that put together Twitter's IPO. He has been able to hit the ground running considering his intimate knowledge of Twitter's business. He also brings a strong relationship with the NFL to the table after serving as CFO for the organization from 2008 to 2010.
Making things happen
Twitter looks much better today from a management perspective than it did at its IPO in late 2013. The new management brings expertise in significant areas, such as advertising, video, and sports.
It's slowly rolling out new products such as curated timelines and a "buy" button, which have a lot of potential to engage users, get them to register, and ultimately increase Twitter's revenue. Noto mentioned that he thinks he can charge a premium for advertisements on curated timelines and was key to establishing the curated timelines for the NFL this season.
Twitter's recent bond offering gives Twitter about $5 billion at its disposal to play with. It's likely the company is gearing up for an acquisition. If done right, a new acquisition could help expand Twitter's user base and improve its monetization.
Trust your management
Remember, when you make an investment you're buying shares in a company. If you don't think the management is doing a good job, you probably shouldn't invest.
Twitter has had some management problems in the past, which have shown up most notably in its disappointing user growth. The signs are that Costolo is starting to turn things around now, and Noto is extremely capable as CFO. Twitter has a lot of work to do still to innovate its product and keep up with Facebook and other competitors.
If you think management is capable of executing on its potential, Twitter is a great investment. But any company where you don't trust the management to perform isn't a good investment.
