Twitter Inc: Can Anything Prevent a TWTR Stock Crash in 2016?

twtr stockTime to Bail on TWTR Stock?

Twitter Inc (NYSE:TWTR) stock got quite a bit of attention by tumbling more than seven percent in just two trading sessions. While that was in large part due to the results of Britain’s EU referendum, looking a bit further back, things don’t get any better for Twitter. In the past 12 months, Twitter stock has declined 53.7%. Is there any hope left in the once-popular micro-blogging platform?

The answer is yes and here’s why.

According to Twitter, the company’s biggest challenge is to convince the mass public of the value of its service. During an earnings conference call last summer, Twitter’s chief financial officer, Anthony Noto, said, “In short, we have not communicated why people should use Twitter, nor made it easy for them to understand how to use Twitter. This is both a product issue and a marketing issue.” (Source: “Twitter’s CEO Jack Dorsey on Q2 2015 Results – Earnings Call Transcript,” Seeking Alpha, July 28, 2015.)

That earnings conference call marked the beginning of Twitter stock’s more than 50% downhill trip.

No one wants negative returns, but admitting there’s a problem is the first step to solving it. Since its earnings call, Twitter has made some solid progress. These steps might not seem to be that big of a deal on their own. When viewed together, though, it’s clear that the company has improved its product quite a bit.

First up was the adoption of algorithmic timelines. Previously, tweets were displayed in reverse chronological order. Now, if you open Twitter after being away for a while, the top tweets you see are those that Twitter believes you care about most.

Note that Facebook Inc (NASDAQ:FB) has been using algorithmic timelines like Twitter’s for users’ Facebook newsfeeds for years—and users loved it. Moreover, even if some Twitter users don’t want algorithmic timelines, they can easily turn off that feature in the settings.

Then there’s the increase in the length of tweets. Previously, each tweet was limited to 140 characters—period. In March, the company announced that it’s making changes to what counts toward that 140-character limit. In particular, “characters” used to include media links to pictures, videos, and GIFs, as well as people’s avatar names. Now, these particular characters won’t count toward the character limit. (Source: “Coming Soon: Express Even More in 140 Characters,” Twitter’s Official Blog, May 24, 2016.)

In my opinion, Twitter’s biggest improvement in 2015 was adding native video capabilities. Many users prefer images and videos to reading text (that’s part of the reason why Twitter’s conciseness is so appealing). From December 2014 to December 2015, video views on Twitter skyrocketed by 220 times. (Source: “Twitter Q4 and Fiscal Year 2015 Shareholder Letter,” Twitter Inc, February 10, 2016.)

Note that because of its newsy feel, companies have started using Twitter as a video platform to announce their newest products. For instance, when Walt Disney Co (NYSE:DIS) decided to unveil the first full trailer of Star Wars: The Force Awakens (which later turned out to be the highest-grossing film of all time), it released it on Twitter first.

The above improvements have helped the company address its major issue—user growth. In the first quarter of 2016, Twitter had 310 million monthly active users (MAUs), representing a three percent increase year-over-year and a gain of five million users quarter-over-quarter. (Source: “Twitter Q1 2016 Shareholder Letter,” Twitter Inc, April 26, 2016.)

Of course, what investors really care about is how these initiatives could help with Twitter’s financials. On that front, there is one main contributor—video.

You see, to Twitter, video ads are more lucrative compared to text and image ads. Moreover, video ads look just like other content so they are in line with native advertising.

In the most recent quarter, Twitter’s total ad engagement surged 208% year-over-year, mainly driven by the adoption of auto-play video. And since advertising makes up the bulk of the company’s revenue, continued improvement in video ads should give a solid boost to Twitter’s financials in the quarters to come.

The Bottom Line on TWTR Stock

No doubt, Twitter is still playing catch-up compared to its more successful peers in the social media business. However, the company seems to know what it’s lacking and has been addressing its issues quite effectively.

The bottom line: there is still hope left in Twitter stock.