Shares of Twitter (TWTR -1.12%) haven't fared well recently. Year-to-date the stock price is down by about one-third, and investors that got in shortly after the company's IPO have seen a huge loss on investment. The return of Jack Dorsey as CEO has done nothing to quell concerns about user growth and the subsequent impact a stagnant (or even declining) user base could have on revenue growth.
The company looks pretty ugly right now with the executive management team in disarray and increased stock compensation being used to retain employees. But the stock may have hit a bottom earlier this year. Here are three reasons Twitter stock could rise.
1. Near-term catalysts for user growth and engagement
Twitter will benefit from a couple huge events in 2016, which have incredible potential to drive engagement, retain users, and grow ad revenue: the Olympics and the U.S. presidential election.
From a user perspective, Twitter has shined in the past when it comes to global sporting events. The Olympics will generate global interest in sporting news. Twitter's ability to collect and organize content in its new feature Moments or a special feature like a scoreboard (which it did for the FIFA World Cup and NFL games) could help increase engagement on the platform. Additionally, Twitter has turned toward more video, including its live-streaming app Periscope, which could boost engagement even further compared to previous events. While there may be less global interest in the U.S. election, it's still a major event with the potential for similar results.
From an advertiser's perspective, a lot has changed since the last Olympics, and there's more potential for marketer activity. "This is [marketer] activity that the last elections and the last Olympics did not exist, especially these ad products," COO Adam Bain told investors during the company's fourth-quarter earnings call. "So whether it's video to drive persuasion budgets in the elections or video to drive television budgets to correspond with TV budgets that run on the Olympics, we're going to be in a really good position."
2. Pulling all the monetization levers
Twitter's revenue growth has remained strong over the last couple years despite the massive slowdown in user growth. In 2014, the company posted 111% revenue growth. It followed it up with revenue growth of 58% last year. This year, analysts expect revenue growth to slow to 33.6%.
But Twitter has a few levers it's capable of pulling. The first is its decision to test its ability to monetize logged-out visitors. Management has been talking about its logged-out audience for almost two years. The company says it sees 500 million unique visitors to its website every month that don't log in. Management believes these visitors can be monetized at half the rate of its average user. If their estimate is correct, that's a potential 83% increase in total ad revenue.
Twitter also has room to increase its average ad load. Long term, management thinks it can increase its ad load to 5% -- i.e., one tweet in 20 is sponsored. While management has already started increasing ad load, CFO Anthony Noto told analysts "we still have headroom in what we think we can do as it relates to ad load" during the company's fourth-quarter earnings call.
Significantly, the ad load increase came from increased demand, not a decision to increase supply by Twitter. Twitter needs to continue growing total active advertisers in order to successfully increase its ad load.
Finally, Twitter is actively working on improving ad engagement rates. While ad engagements have gone up the last few quarters, it's more a function of autoplay video ads rather than increased efficacy. However, changes like the new algorithm-sorted timeline and new measurement tools and ad formats could help boost the ability for ads to convert.
3. Better measurement and reach through DoubleClick
Twitter kicked off its partnership with Google's DoubleClick ad platform in the fourth quarter. It's currently running a pilot with the DoubleClick Campaign Manager through the first quarter. DCM will enable DoubleClick users who advertise on Twitter to gain more insight into how their ads on Twitter stack up with the rest of their ad campaigns. Twitter is betting that this will show the true efficacy of ads on the platform, increasing demand from existing customers.
The other side of the deal is that Twitter will also become an available option for buying ads through the DoubleClick Bid Manager. This will make it easier for DoubleClick users to buy Twitter ads, and also expose Twitter ads to the bounty of advertiser's using the Alphabet (GOOG 2.15%) (GOOGL 2.37%) subsidiary's ad platform.