Twitter (NYSE:TWTR) stock isn't getting a lot of followers lately. Wall Street analysts and investors are concerned about slowing user growth, which has led the stock to fall by more than 40% from its highs of the past year. However, management has a plan to monetize a much larger audience than its current user base, and this could be a big game changer for Twitter stock in the middle term.
As previously discussed, one of the main reasons for negativity surrounding Twitter stock is that the social media sites' user growth seems to be slowing down. If that wasn't bad enough, engagement trends are showing some negative signs as well. Based on the company's financial report for the third quarter of 2014, Twitter has 284 monthly active users, a 23% increase versus the same quarter of the prior year.
The year-over-year increase in the user base was quite healthy; however, sequential growth seems to be decelerating, as the company increased its monthly user base by only 5% versus the second quarter. Perhaps even worse, timeline views grew only 14% year over year. Since timeline views are growing at a slower rate than users, this could be interpreted as a sign of declining interest and engagement from Twitter users.
To put the numbers in perspective, Facebook (NASDAQ:FB) is substantially larger than Twitter, with a gargantuan user base of 1.35 billion monthly active users. A bigger size should theoretically make it tougher for Facebook to sustain rapid growth, but the company is still expanding quite strongly, considering its size. Facebook increased its monthly user base 14% year over year in the last quarter, while daily active users jumped 19% to 864 million.
The two platforms are quite different, and Twitter doesn't disclose daily active users, so comparisons aren't very straightforward. However, if we focus solely on Facebook's mobile daily active users, the company reported a 39% year-over-year increase to 703 million at the end of the third quarter. That means Facebook's mobile daily user base is roughly two and a half times the size of Twitter's total user base, and it's also growing at a considerably faster pace.
The true size of Twitter
Twitter is trying to make the experience more enjoyable for new users to accelerate growth. The company is simplifying the the sign-up process and providing features to create a fully populated timeline based on users' interests and browsing history. The main idea is to make the platform simpler and friendlier for those who don't understand the Twitter language or who's who in Twitter.
Gaining more active users is important for Twitter, but management believes its economic opportunity is much larger than its monthly active users base. According to management, nearly 500 million people visit the Twitter website or mobile app every month, but they don't log in. Even more impressive, the company estimates that Tweets embedded on other websites or apps generate an enormous 185 billion views per quarter.
This is a big difference between Twitter and Facebook. On Facebook you typically interact with friends and family, but Twitter provides direct access to your favorite actors, political leaders, sports stars, or investing writers, among countless other possibilities.
People who don't have a Twitter account can easily be interested in seeing a particular tweet or feed, and that doesn't happen with Facebook, at least not to the same degree. What happens in Facebook generally stays in Facebook, but when something big happens in Twitter, it generally goes far beyond the platform.
According to The Wall Street Journal, Twitter is working on selling ads on other publishers' websites and apps. This would give the company an opportunity to profit from 185 billion quarterly views, so it could be a big game changer for Twitter, both when it comes to financial performance and investors' perception about the true size and value of the platform.
The Wall Street Journal reports that Twitter is in talks with ESPN and Flipboard to implement this new strategy, but no formal agreement has been reached so far. Any kind of collaboration between Twitter and publishing partners will most likely include a revenue-sharing agreement, making the deal a convenient proposition for both parties.
It's too early to tell how far Twitter can go with this initiative, or how much money it can make from it in the first stages. However, it could certainly be a gigantic opportunity for the company in the medium to long term. On balance, investors in Twitter stock have strong reasons to monitor this new strategy closely.
Andrés Cardenal owns shares of Apple, Google (A and C shares), and Netflix. The Motley Fool recommends and owns shares of Apple, Facebook, Google (A and C shares), Netflix, and Twitter. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.