The biggest thing plaguing Twitter (NYSE:TWTR) and its shareholders is that the company doesn't have a clear vision of where it's going. Active user growth has grown slowly over the last several quarters, and management is telling analysts that the important metrics to pay attention to have changed.
While Twitter can surely increase revenue in the short term by improving ad targeting and increasing ad load, in the long term, it might be selling itself short, according to early Twitter investor and Fab.com (an e-commerce site) CEO Jason Goldberg. But now that Twitter is a publicly traded company and must answer to Wall Street, pivoting away from monetizing users with ads may be too much for Twitter and its shareholders to bear.
Monetizing use, not users
The main point of Goldberg's 44 point tweetstorm about Twitter is that the company should monetize use, not its users.
For the last couple quarters, management noted that total visitors using the platform far outnumber monthly active users. At Twitter's analyst day in November, the company revealed it had 500 million visitors to the platform that never log in. That's compared to the 284 million monthly active users the company claimed at the end of the third quarter. In other words, there's a lot more Twitter usage than users, representing a much larger opportunity.
Goldberg suggests that Twitter moves away from Sponsored Tweets, which expands the organic reach of a users' tweet. Instead, Twitter should focus on enabling services to use its network to distribute content -- any kind of content. He thinks Twitter should distribute movies, podcasts, live streams, long-form content, anything. And he doesn't think Twitter needs to build the tools to do any of it.
Twitter should, instead, support developers to build tools on top of its network, and use the network to distribute content. Goldberg believes Twitter has the potential to be the best one-to-many distribution platform. With 284 million people already using it to share content a measly 140 characters at a time, he might be right.
But who's going to build these tools?
Very few companies make apps for Twitter anymore. Even fewer are making apps that take advantage of Twitter's distribution capabilities. But nobody's going to support developers working to build apps on Twitter. So, Goldberg suggests Twitter invest hundreds of millions of its own dollars in the first round of Twitter apps, and help them scale.
Goldberg is suggesting that Twitter helps build apps that use Twitter's one-to-many distribution capabilities for video and music publishing among other content. To that end, Twitter has built Audio Cards and Video Cards for users to distribute those types of content, but Audio Cards link to iTunes while Video Cards are currently restrained to video advertisements and select content from media partners. Instead, Goldberg thinks Twitter should have an iTunes built on top of its network.
Twitter could use some of its cash raised from its most recent bond offering to do so, but that money already looks earmarked for acquisitions. If Twitter did invest heavily in developers, it would produce practically zero revenue from its investments in the short term. And that's a hard sell to Wall Street.
Google could do it though
Google has proven capable of taking a small company and turning it into a giant distribution platform -- see YouTube. It could do the same with Twitter, and it's capable of investing in developers to create the first round of Twitter apps.
At the end of Google's third quarter, the company had over $60 billion in cash and investments on its balance sheet. It's on target to generate over $10 billion in free cash flow again in 2014, after besting that number in 2012 and 2013. If Google purchased Twitter at about a 50% premium to its enterprise value of about $21 billion, that's still only half of its cash. It could also use stock as part of the acquisition to reduce the impact on its balance sheet.
But would Google really want to acquire Twitter at its current price? The company is trading for more than 100 times expected 2015 earnings and more than 10 times its expected sales. And if the plan is to overhaul Twitter's platform and forego short-term revenue, those multiples move even higher.
In fact, until Twitter provides a clear path to its future -- whether it be Goldberg's idea or someone else's -- I think there's a lot of risk in investing in a company that trades for such high multiples, whether you have $60 billion or $60.