This Should Keep Twitter, Inc. Stockholders Up At Night
Twitter, Inc. (NYSE:TWTR) has been struggling to main its user base growth in the last year or so, and the reason behind it may be simpler than you’d think. It’s an issue that should keep Twitter stockholders up at night.
While the teenage demographic is still going strong in regards to Facebook Inc. (NASDAQ:FB), Twitter’s business strategy has left it looking increasingly like a tool used by “dads.” (Source: “Twitter is a ‘tool for dads’: Analyst,” CNBC, October 26, 2015.) This is essentially the primary reason it has been struggling to attract new users, particularly those under 20, according to a recent segment by CNBC.
Indeed, an August report by the Pew Research centre indicates that among the major social media platforms used by American adults, Twitter ranks dead last. (Source: “Mobile Messaging and Social Media 2015,” Pew Research, last accessed October 26, 2015.) While Facebook is the reigning king with 76% reporting use, Pinterest taking second with 31%, Instagram 28%, and LinkedIn with 25%. Twitter sits at the bottom with only 23% of adult users logging in. The data for teenagers is not as up-to-date, but in 2012, 94% of teenagers used Facebook while only 26% used Twitter.
In a strict numbers-based comparison with competing social media platforms, Twitter appears to be aimed at adults who use it as a professional business tool. Teenagers prefer to use the major social media platforms, such as Facebook. This trend is especially worrying in the long-term sense, because as the population ages and many people go into retirement, an older user base which employs Twitter as a professional tool becomes a serious liability.
For today, however, such conditions have forced the company to streamline its operating expenses. Twitter announced in October that it would be slashing 336 jobs, which amounts to about eight percent of its total global workforce.
This Could Be a Big Problem for Twitter Stockholders
Not only is Twitter facing slowing user growth and disinterest among young people, but it has lately also struggled to translate its user base into solid revenue. Monthly average user growth has been sluggish to say the least, and monetizing the process has left Twitter stuck in first gear. Monetization of social media platforms, a notoriously tricky business by anyone’s standards, has been especially difficult for Twitter. The TWTR stock price has been witness to this struggle, having fallen by about 40% in value over the last year.
While monthly average users stood at 304 million in the second quarter of 2015, representing a 12% growth compared to the same period in 2014, this is only a miniscule increase of 0.65% increase over average users in the first half of 2015. (Source: “Twitter is a ‘tool for dads’: Analyst” CNBC, October 26, 2015.)
Translation: Twitter’s user growth this year has effectively stalled, and both analysts and investors alike are more than concerned.
What’s the Market Verdict on the Twitter Stock Price Forecast?
The big names have not been slow to take notice of this worrying trend, with Morgan Stanley downgrading TWTR stock to its “underweight” category, at a price target of $24.00 per share. (Source: “Morgan Stanley just slammed Twitter,” Business Insider, October 21, 2015.)
Analysts have been fairly consistent in pointing towards Twitter’s inability to sustain a viable revenue model as the core issue facing the social media platform. If company executives don’t figure out a way to deal with the twin problems of stagnating user growth and monetization, Twitter’s stock price could very well plummet.
The larger problem here is that it’s not enough to simply build a great product, which Twitter certainly is. Insofar as it functions as an online platform for people to rapidly communicate with each other and spread viral tidbits of news, it is unsurpassed. But generating revenue is what ultimately drives a company, not its underlying usefulness. Therein lies the problem faced by many young companies in the internet age, as they struggle to maintain the balance between strategic vision and financial balance sheet.
These major structural issues have led to a leadership shakeup with Jack Dorsey’s return to the CEO position. (Source: “Jack Dorsey in the spotlight as Twitter readies for Q3 results,” Yahoo Finance, October 26, 2015.) Not only has the top spot been subject to changes, but Twitter has also seen high management turnover, internal questioning over the company’s value, and conflicting strategies for how to best implement new initiatives to attract new, and hopefully younger users.
The Bottom Line for Twitter Stockholders
With rising concern over the company’s stagnating user base, along with general pessimism regarding its medium and long-term strategy for monetization, I remain bearish on the TWTR stock price for the rest of 2015 and into next year.
The San-Francisco-based Twitter is course to announce its third-quarter earnings report for 2015 on Tuesday, October 27th. While Twitter was able to surpass analysts’ forecast in the second quarter of 2015, its CFO reported several months ago for investors not to expect a similar development. Perhaps it’s then unsurprising that analysts are overwhelmingly bearish over TWTR stock’s prospects going into 2016.