How Twitter Makes Money, Even Though It Isn’t Profitable Yet

How does Twitter Makes Money

Twitter Metrics Soaring, but Investor Patience Isn’t

Unfortunately, it’s going to take me more than 140 characters to describe Twitter, how it makes money, and why its share price is suffering.

What Is Twitter?

For those not in the know, Twitter, Inc. (NYSE/TWTR) is an online social media microblogging service that allows its users to post and read messages up to 140 characters in length, which are called tweets. Launched way back in 2006, Twitter is now the seventh most popular web site with 284 million unique monthly visitors.(1)

Twitter is available in 35 languages and more than 77% of the site’s users live outside of the United States. In 2007, Twitter was hosting 20,000 tweets per day; today, it sends 500 million tweets per day. And each day, the site’s 284 million monthly active users greet 135,000 new members.

Twitter needs that growing user base. In the fickle age of social media, Twitter has a retention problem. While about 25% of Twitter accounts created in 2008 are still active, only 10.7% of those new accounts created in 2012 are still tweeting.(2) Early adopters are still keen on Twitter, but it’s been tough to keep newer subscribers engaged.

Advertisers Are Doing Well with Twitter…

On one hand, Twitter’s retention problem is a major red flag for advertisers (and investors). On the other hand, Twitter’s top member accounts show that it still has a handle on a lucrative target audience.

At random, Katy Perry is ranked #1 (with 63.7 million followers), Justin Bieber is #2 (59.5 million), Barack Obama is #3 (53.5 million), Taylor Swift is #4 (51.0 million), Rihanna is #9 (39.5 million), and Ellen DeGeneres is #10 (38.0 million).(3)

My point is that the top 10 Twitter accounts alone cater to the widest possible consumer base and are a bonanza for advertisers. This is important because Twitter gets most of its advertising money through targeted “promoted tweets.” Advertisers can also buy space on users’ timelines and search results.

For the most part, advertisers seem to like the captive audience they have on Twitter. In 2010, Twitter generated $45.0 million in advertising revenue and by 2013, it had jumped to $405.5 million.

In the third quarter of 2013, Twitter reported advertising revenue of $320 million. A 109% increase over the third quarter of 2013. For the full year, Twitter expects to report revenue in the range of $1.36 billion to $1.37 billion.(4)

Twitter Not Doing Well with Twitter

Despite a growing user base and ballooning revenues, Twitter has trouble turning a profit. And investors are, justifiably, none too pleased.

In 2013, full-year revenue was up 110% year-over-year at $665 million. The exuberance over the company’s revenue growth was blocked by increasing net loss. The company’s earnings burrowed deeper from a loss of $79.3 million in 2012 to a loss of $645.3 million in 2013.(5)

The company’s share price has followed suit. In November 2013, Twitter made its debut at $45.10. By the end of the year, optimistic investors helped the company’s share price hit a high of $74.73. But in a world where fundamentals matter, Twitter has since fallen on hard times.

In 2013, the company’s share price lost 43% of its value. Since hitting a high of $74.73 on December 26, 2013, Twitter has lost roughly 50% of its value. Currently trading near $38.50 per share, Twitter is down 15% from its initial public offering (IPO) price.

Twitter might have legitimate reasons for not turning a profit (acquisitions, research and development, etc.), but investors don’t really care. The company is clearly good at generating revenue, but getting into the black is a different issue altogether. It’s reflected in their share price and will continue to be.