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3 Reasons Twitter Stock Could Rise

By Adam Levy – May 15, 2015 at 9:23AM

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There's not much to like about Twitter's stock right now, but here are some reasons it could improve.

Source: Twitter

There are a lot of things going wrong at Twitter (TWTR) right now. User growth continues to slow, and ad buyers aren't willing to spend as much as originally anticipated. Last quarter, the company generated just $436 million in revenue, well below analysts' expectations of around $457 million. And while earnings came in above expectations, and user growth returned to normal after an extremely disappointing fourth quarter, they weren't enough to offset the huge miscalculation of revenue expectations.

At this point, investor sentiment and faith in management is moving in the wrong direction, which has a direct impact on the company's stock price. Nonetheless, there are a few reasons the stock price could increase. Let's examine three ways Twitter is building its business.

Delivering better results for advertisers
Last year, Twitter switched to a cost-per-action pricing model ( which only charges advertisers when a user completes an action) from a cost-per-impression pricing model (which charges advertisers for every impression regardless of how it converts). Management says this change is one of the biggest reasons ad revenue didn't meet expectations last quarter. Many advertisers balked when ad prices increased despite the fact that Twitter was delivering leads further down the conversion funnel.

Underlying the problem, however, is that Twitter's advertisements simply aren't converting as well as anticipated. Twitter's raw assets include an interest graph that's unparalleled by any other advertising platform, and its users are able to cull and curate a timeline full of tweets that are interesting to them, so they're not skimming as much compared to other news feeds. That makes Twitter a potentially great place to advertise.

But Twitter clearly still has work to do to improve its targeting and ad efficacy. To that end, Twitter continues to invest heavily in R&D, and it purchased adtech firm TellApart ahead of its first-quarter earnings release. The company is spending $533 million in stock to acquire TellApart, its largest acquisition yet, so it understands the need to improve its targeting abilities. TellApart specializes in cross-device retargeting, which means a user could see an ad on the desktop version of Twitter, and then see the ad again on mobile based on their initial response.

Improving the efficacy of its ads will have a direct impact on Twitter's ad revenue now that it's shifted to a cost-per-action model. Twitter will be able to generate more revenue from the same number of ad impressions.

Working to make Twitter more engaging
Twitter started rolling out a lot of new features this year. If a user is logged-out of Twitter for 12 hours or longer, a "While You Were Away ..." box with three curated tweets will show up at the top of the user's timelines. The feature surfaces tweets that Twitter believes a user will be extremely interested in, which emphasizes the idea that there's always something good to find on Twitter. Additionally, the company continues to work on unique features like @MagicRecs, which recommends new accounts to follow, as well as common features like native video and other media.

Still, Twitter has a lot of catching up to do as users find their time split among several social media apps. The average U.S. Twitter user spend an estimated 17 minutes in the app per day, which ranks it as just the fifth most engaging social network. Finding new ways to keep users in the app and keep them coming back more often will increase the number of ad impressions Twitter can show, and ad revenue will follow.

Attracting and keeping new users
Twitter revamped its sign-up process for new users late last year to make it easier for visitors to get started using Twitter. It reduced the number of steps it takes to sign up, and it introduced Instant Timelines, which prepopulate a user's timeline based on his existing contacts, interests, and contacts' interests.

On the company's first-quarter conference call, management noted that Instant Timelines improved engagement among new users, but didn't improve user retention. If Twitter can figure out the other half of the equation, it could provide a significant boost to Twitter's active users as its abandonment rate declines.

Additionally, Twitter revamped its homepage for logged-out visitors, providing a list of curated timelines featuring things like "NBA Players," "Pop Artists," and "Cute Animals." The new homepage allows people just hearing about Twitter through other outlets to find out what it's all about before signing up. Previously, many users signed up without realizing how they could use Twitter, which led to a high abandonment rate, while others simply didn't sign up in the first place. Twitter just introduced the new homepage, so we won't see its impact until the company's second-quarter report.

Twitter's recent efforts have a strong potential to increase Twitter's user growth, and keep those new users engaged. Ultimately, that leads to more ad impressions and more ad revenue, and that could boost the stock price as investors regain confidence.

Adam Levy owns shares of Apple. The Motley Fool recommends Apple and Twitter. The Motley Fool owns shares of Apple and Twitter. We Fools may not 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.

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