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Only 1 Number Will Make Me Buy Twitter Inc. Stock

By Leo Sun - Jan 25, 2016 at 1:45PM

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Twitter’s stock price won’t improve until its active user growth does.

Shares of Twitter (TWTR 3.74%), which have been cut in half over the past 12 months, now trade at a 30% discount to its IPO price. But under CEO Jack Dorsey, who returned to the job last October, Twitter introduced several strategies to stop the bleeding.

Twitter launched Moments, which curates "the best" tweets into a single tab. It also replaced Favorites with Likes, tested non-chronological tweets, experimented with ads for logged-out users, and launched "conversational" ads that encourage users to reply. The company is also rethinking its 140-character limit on tweets. While those projects indicate that Dorsey clearly wants to improve Twitter, they don't address the one number everyone is watching -- monthly active user (MAU) growth.

Source: Pixabay.

How weak is Twitter's MAU growth?
Back in 2013, former CEO Dick Costolo proclaimed that Twitter's MAUs would hit 400 million by the end of the year. Last quarter, Twitter's MAUs rose only 11% annually to 320 million -- its weakest growth since going public. By comparison, MAUs rose 15% in the previous quarter and 23% a year earlier.

To make matters worse, Twitter's "real" MAU count is clouded by bots and spam accounts. At the end of fiscal 2014, Twitter admitted that 8.5% of its accounts were bots or programs that "contacted its servers for regular updates" without any human interaction. Twitter hasn't updated that percentage since then, so it's unclear how many of its MAUs are actually human.

Meanwhile, an entire gray market of selling fake, software-generated followers has emerged. Twitter has arguably turned a blind eye to these fake accounts, since bot-generated retweets strengthen its data licensing business. Sales at that unit, which sells a "firehose" of tweets to companies, news agencies, and even high-frequency trading firms, rose 37% annually last quarter and accounted for nearly 10% of Twitter's top line.

Beaten by Instagram
In December 2014, Facebook's (META 5.82%) Instagram reached 300 million MAUs, making it bigger than Twitter, which had 284 million MAUs at the time. When confronted about Instagram's growth, Twitter co-founder and former CEO Evan Williams told the Telegraph that Twitter makes "a lot more money than Instagram."

Instagram. Source: Google Play.

Last September, Instagram hit 400 million MAUs. Cowen & Co. analysts estimated that Instagram generated $700 million in sales last year. While that figure is lower than Twitter's projected revenue of $2.2 billion for fiscal 2015, Cowen expects Instagram's revenues to soar to $5.8 billion by 2020. Analysts expect Twitter's annual sales growth to slow to 58% this year and 40.5% to $3.1 billion in 2016. If that growth continues to slow, Twitter could make less money than Instagram by 2020.

Why Twitter's MAU growth is terrible
During Twitter's second-quarter conference call in July, CFO Anthony Noto stated that he didn't "expect to see sustained meaningful growth in MAUs" until Twitter reached "the mass market" but that the effort "will take a considerable period of time." That statement was basically an admission that Twitter was a niche network with limited appeal.

Since Twitter is a digital soapbox that promotes one-way communication instead of deeper social interactions, average users with a handful of followers don't have any reasons to tweet. Its interface of hashtags, symbols, and character limits also isn't user-friendly to new users who are accustomed to Facebook or Instagram's simpler interfaces.

Twitter also doesn't have a clearly defined purpose among social networks. Facebook is a place to connect with family and friends, Instagram is for sharing single filtered pictures or videos, and LinkedIn is for building work connections. Twitter seems to just be a news feed for following famous people, sites, or brands.

The only number I'm looking for
Twitter has two notable strengths. First, average revenue per user came in at $1.78 in the third quarter, up from $1.59 in the second quarter and $1.27 a year earlier. This indicates that the company can still squeeze out more sales per user even as MAU growth fades. Second, it remains a potential takeover target for tech giants looking for a social networking presence or aging news publishers seeking digital expansions.

But in the end, Twitter stock won't stop falling until its annual MAU growth stops sliding. If that growth comes in above 12% when it reports its fourth-quarter earnings on Feb 10, brave investors might consider starting a position. But if that figure slides below 10%, I'd stay far away from this stock.

 

Leo Sun has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Facebook, LinkedIn, and Twitter. Try any of our Foolish newsletter services free for 30 days. 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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Twitter, Inc. Stock Quote
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