Twitter (TWTR)

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Announcements

Thank you for reading my analysis on Twitter. As always, it means a lot to me that you would trust me with your attention. I do not take that trust lightly.

This is my second analysis. My first analysis on Roblox was rough, and this analysis will be ever-so-slightly less rough. I have learned a ton, although I still feel it is just the beginning. Many conversations and kind emails from members have helped me immensely.

What you are reading is a lightbox. I will take extra time to explain some things in the body of the analysis. Just click on this note icon 📝 for a lightbox to dive just a little deeper. I like doing things like this because they are fun, and because I need to learn how to code in order to aggressively pursue future opportunities for members.

All images are clickable lightboxes so they will be much easier to see details.

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I have a hidden ‘easter egg’ somewhere in this analysis for the hardcore irreverent investors out there. Good luck searching!🥚

My Perspective

  • Twitter is at the intersection of the creator economy, search, and discovery.

  • More and more users will input their payment details, helping to improve advertising effectiveness and consequently generate growth.

  • Jack and co have accepted the new era of ‘innovation + evolution’ over the old standard of ‘don’t rock the boat’. Twitter will be messy for a couple years, and then everybody will want to own it. This is the new era: The Great Innovation Race.

  • The connection between users is strengthened by Twitter with things like Revue, Tips, and Twitter Spaces. Twitter is creating incentives for users to add value to one another, thus planting the seeds for much more robust growth in approximately 1 year. Stakeholders benefit when users have a strong connection in the network, as will be shown in future ARPU numbers. (Average Revenue Per User)

Contents

1. Intro

Thank you for reading my analysis on Twitter. As always, it means a lot to me that you would trust me with your attention. I do not take that trust lightly.

This is my second analysis. My first analysis on Roblox was rough, and this analysis will be ever-so-slightly less rough. I have learned a ton, although I still feel it is just the beginning. Many conversations and kind emails from members have helped me immensely.

I am new at this, and to come in blind without outside help is extremely foolish. This analysis, and consequently many future analyses are better because of the outside wisdom found in books and generous friends.

This analysis is made possible by Canalyst. They are an excellent resource for analysts and researchers such as myself. Check out their website here.

2. Investment Thesis

Do One Thing Well – Advertising

Twitter has a broken relationship with advertising, their number 1 source of revenue. They just acquired Scroll which is an interesting move. Here’s why:

  • Jack and the team know that advertising is a dying game that only has so much saturation left before they are all out of eyeballs. It’s a race to the bottom. The Scroll model conversely pays more for attention. The real advantage for creators here is that quality is incentivized. Ie: the better the quality of content, the longer the reader stays on the platform, the more the creator (and Twitter) earn in revenue.

  • The advertising model has a push-pull effect. No user likes ads, but creators want ads. Users would be driven from Twitter if every creator got their way. Now it’s different. Create better content, serve your niche, and capture the attention. It incentivizes creators to create better long form content within Twitter.

  • Curation is huge right now, and the Scroll model capitalizes on that. How I understand it is like this: Twitter, curators, and users, all benefit from the relationship.

Note: This doesn’t mean Twitter should shy away from advertising, just that they are branching out in new ways of creating value and incentivizing users to earn for Twitter. A classic symbiotic relationship between Twitter, users, and investors. There is still a lot of room to run with advertising, but advertising as a model will become outdated quicker than most believe.

Directly from Scroll’s website.

Directly from Scroll’s website.

Split Leadership

The leadership within Twitter has a history of misalignment. While I like my companies to “fire on all cylinder” it seems that Twitter has been firing on all cylinders but with the front wheels pointing different directions. Not ideal. Jack has a history of hesitation to pull the trigger, disguised as “working on product.” Their new slogan of ‘evolution’ is a bold move, one for which Jack and team must grow into. This comes as a push from Eliot Management. You can ready more about that here: Jack Dorsey Has Quietly Ended An Attack On Twitter (forbes.com)

“The man who chases two rabbits, catches neither.” ― Confucius

Jack is also the CEO of Square, another prosperous public company. My question, and yours, should be “how can a CEO devote 100% of his time to two companies?” The answer is: he can’t. Twitter and Square both suffer from an attention-split leader. “But look at how well Twitter is doing”. Nope. Let’s compare Twitter to Facebook, the social media platform that ‘nobody uses anymore except for birthdays’:

Here is Twitters revenues from 2013-2020. Not bad, right?

twitter-inc-twtr (3).png

Now let’s compare with Facebook, the social media platform that ‘nobody uses anymore’:

twitter-inc-twtr (4).png

While Facebook has been getting after it, Twitter has been farting around. I blame leadership. Some will say this is a bludgeoning approach, I say “Fix it, Jack.” The model of Twitter should beat the model of Facebook, but it’s not. I looked at revenue here to get a sense of raw power generated by the two companies. I’m specifically not looking at profit, yet.

Last note on split leadership: Square has more financial incentive for Jack than Twitter. One of my core beliefs is that incentives drive behavior, no matter how gifted the individual, even Jack Dorsey. If I am to invest, I want to invest in the best and to have their undivided attention on the business. This is the main negative aspect of Twitter, and possibly enough to turn me away from investing.

Stuck In Censorville – Town Squares and Living Rooms

Twitter unfortunately got stuck in the middle of Trump and his debacle. It was interesting to see Twitter boot Trump and many others from the platform. It was not interesting to see Twitter suspend many other businesses and individuals from Twitter (@visualizevalue, @value, and others). It’s unfortunate that Twitter must play this role of moderator, and one that Jack and co are looking to circumvent with the iteration of Blue Sky Project, an “to develop an open and decentralized standard for social media. The goal is for Twitter to ultimately be a client of this standard.” (Jack). This kind of forward-thinking will help keep Twitter relevant for much longer.

While many view Twitter as the town square, it is in fact Jack’s living room. If we break his rules, no matter how vague, we are out. The Blue Sky Project turns this ‘living room’ philosophy into a ‘town square’ where nobody can kick you out. We’ll see how this plays out.📝

I am pretty excited for this. I thin it will have wide-ranging impacts that we cannot see yet.

“We don’t need no stinking feet!”

People are creating their own revenue streams off of twitter, and then working extremely hard to pull those people off Twitter and onto YouTube, their membership website, a podcast, blog, or Substack. As Twitter keeps axing people, they are essentially cutting off their own feet in the network. A network of hundreds of millions of users is strong, but when those users get suspended the other users see it. This should be one of the top priorities for Jack and his team, but they are not taking it seriously. It’s been years now. Every time a node in the network gets destroyed, it sends a signal to the other nodes of “have an exit plan” which speeds the process of exiting nodes: people are hesitant to sign up for twitter, or leaving twitter because of this. “Why aren’t Daily Active Users (DAUs) growing?” No shit, Sherlock.

Acknowledging Shortcomings

From the NY Times:

Mr. Dorsey said he now believes that he made a critical mistake: not hiring experts to help him understand the potentially far-reaching importance of apparently small design choices.

“The disciplines that we were lacking in the company in the early days, that I wish we would have understood and hired for,” he said, were “a game theorist to just really understand the ramifications of tiny decisions that we make, such as what happens with retweet versus retweet with comment and what happens when you put a count next to a like button?”

I’m a firm believer in the ability of companies to turn themselves around and crush it after a period of complacency, but we’ll see if this is just talk or a turning point. Another instance of “we’ll see”.

Jack, Square, and Twitter – Capturing Payment Data

Ideally Twitter and Square would combine forces, but that might not happen. The next best thing would be for Twitter to capture payment details of users, not just advertisers. This way, Twitter would have data on what users are spending their money on, and in turn give the tools to evolve their advertising machine into a much better revenue stream. The current ads on Twitter are abysmal and unfocused.

Inevitable Advertising by Payment History and One-Click Buy

Combine Twitter’s upgrades with Revue, Twitter Spaces, Scroll, etc. and you have a powerhouse app. I think Twitter knows that. The main thing is getting people to input their payment details. This way they will be able to see what people are buying, important trends to know if you’re going to improve the advertising experience. Note: Twitter just launched the Tip Jar, the ability for users to link a 3rd party payment app that allows users to accept payments from other users. It’s happening quickly.

Innovation-Per-Year: The New Standard

Elon musk recently said “Speed of innovation is what matters. I do say this to my teams quite a lot. Innovation per-year is what matters.” If a company is not innovating, they are sliding backwards. The thing is, we now have a new standard for what it means to innovate. The pace has increased dramatically. If Twitter can keep this pace of change then it will have a bright future. The other thing is, Twitter tends to pluck low-hanging fruits of other platforms and incorporate it into their own platform: newsletters, fleets (instagrams stories), and super follows (a patreon knock-off, coming soon).

3. The Model

What makes Twitter Interesting?

“Twitter is what’s happening in the world and what people are talking about right now.” (10-k) Twitter is its own beast: at first glance they seem to own the network that connects all professionals and niche interest groups. Many businesses have tried to replicate Twitter over the years to no avail. Even with all the glaring hiccups from Jack and co, it seems Twitter will not die even from embarrassing lack of implementation up until recent quarters.

This is my main reason for looking at Twitter. I, and so many others, are reliant on it that it seems that mangement would do everything possible to make it better at a faster rate than is currently held. Why do they go so slow? Why do they flat-out censor small businesses and individuals? (Recently Twitter cancelled VisualizeValue, Value, and others).

From their 2020 10-k:

Our primary product, Twitter, is a global platform for public self-expression and conversation in real time. Twitter allows people to consume, create, distribute and discover content and has democratized content creation and distribution. Through Topics, Interests, and Trends, we help people discover what’s happening live. We also continue to implement live broadcasts and on-demand video content across Twitter, including through partnerships with media outlets and our platform partners. Media outlets and our platform partners also help extend the reach of Twitter content by distributing Tweets beyond our products to complement their content. People can also express themselves using creation tools like Voice Tweets and Fleets, which allows everyone to start conversations in a new way – with their voice or with their fleeting thoughts using text, reactions to Tweets, photos or videos.

“Democratized content creation and distribution” unless you do not play by their arbitrary and foggy rules.

Let’s back up, look at the basics of Twitter as a business, then I’ll address these pain points.

Revenue Streams

Twitter currently has two large revenue streams: advertising and data licensing.

In 2020 advertising made up for 86% of revenue while data licensing ‘and other’ made up for the remaining 14%. If we look at the quality of advertising within Twitter, it’s pretty bad. Example: I see pop stars and NFL ads but have yet to watch any modern TV or watch a football game on NFL. It’s so bad it deserves to be written off, but still companies are paying good money to advertise on Twitter.

One point that needs a note: promoted tweets that contain video, which users or companies pay Twitter in order for Twitter to put those tweets in front of other users, sometimes have an ad within them.

How Twitter Makes Money

Twitter makes money by selling ads to users. These ads are then shown to target audiences around the world. (Twitter calls these ads ‘promoted products’ but we’ll keep it simple and call them ads). Now, any user can create an ad with a tweet, pre-roll video, their account, or a trend. Twitter takes a cut of those monies spent on ads by the user in exchange for distribution across the network. I must note here that it’s amazing that Twitter is still in business with such terrible ad placement. For instance: they are running pre-roll advertisements on top of promoted videos, making it common to see a 30 second commercial for a cleaning solution in a tweet labeled “Monday night NFL lives here.”

The image below is a little fuzzy, but notice a few things: Daily ARPU (Average Revenue Per User) and Advertising Revenue Growth. I think both of these numbers will beat common estimates, even the estimate below in the Canalyst model.

(Click on image to expand)

Distribution

On every phone and computer in most countries, Twitter has no problem with distribution. It seems almost everyone knows what a ‘tweet’ is and what ‘twitter’ is.

From Business of Apps:

It was rated 11th in the world for engagement by Alexa in 2018, and #21 in Forbes Top 100 Digital Companies 2018. In late 2020, it ranks 49th in the former, and did not feature in Forbes’ 2019 listing. It was rated 4th in the world in October 2020 by SimilarWeb for traffic, however – in a year rich with news.

As the world becomes ever more so interesting Twitter will hopefully play a bigger role. This goes back to the point that Twitter is where news happens. It’s where world leaders and the biggest companies put out up-to-the-minute updates.

Understanding The Customer

First of all: who is the core customer? Here’s some numbers to help us understand.

  • Twitter users make 9% more than the average American.

  • 41% of Twitter users surveyed earn a household income of about $75,000 (vs 32% overall)

  • Only 23% of people on Twitter earn less than $30,000 annually

  • In the United States, 42% of Twitter users have at least a bachelor’s degree, compared with 31% of the general public.

Here’s some more fun info about user demographics:

The main point here is that the user base for Twitter is diversified across the globe and across socioeconomic boundaries.

It feels almost too easy to make the logical assumption that the more twitter evolves to accommodate the creator economy, the more people will sign up around the world. I believe we are in the infancy stages with a lot of room to grow. Right now the negative political stigma makes Twitter a ‘yucky product’ but that will soon change. We will see people using Twitter for use cases that we haven’t even imagined yet.

A small note on customer retention.

Customer retention rate is interesting. When a new user follows 30 accounts and roughly 10 of those follow back, the user becomes more active on the site. It’s another no-brainer, but we see that Twitter is incentivizing users to engage and keep the attention of other users through enabling the creator economy. This is a major plus.

Is Twitter customer oriented?

With the addition of Elliott Management to the board last year, Twitter has become more customer oriented. Some would say the addition of Elliott Management has pushed Twitter to be ‘profit oriented’ but they are one in the same, just a delayed response. In order to be profit oriented, a business must be customer oriented. Being ‘customer oriented’ is a leading indicator of profit.

If you’re unfamiliar with Elliott Management and the relationship it has with Twitter, check this out: https://www.forbes.com/sites/abrambrown/2021/04/01/jack-dorsey-elliott-management

Elliott Management is exiting the current role with Twitter. I think this is due to the fact that Jack has gone from a whimsical 50% manager to a confident 100% leader, who is focused on growth by serving customers. We can see this by the implemented features in the last year.

What pain does Twitter alleviate for the customer?

Twitter connects people with news, leaders, brands, niche interests, and events in a way that no other platform can.

Let’s look at Metcalfe’s Law:

The value of a network is proportional to the square of the number of users”

Now, the value added to the node (that’s you and me) is 1:1 with the value of the network. As soon as any user becomes part of the Twitter network, they benefit from the entire value of that network. Because Twitter is growing and more people will be on it, it’s value will go up.

There would be so much turmoil if Twitter disappeared tomorrow. Entire businesses, relationships, and workflows would be interrupted. Not only would the loss of Twitter as a company, but the loss of subsequent businesses that operate on top of the platform.

4. Background

Jack started Twitter in early 2006 as a way for his coworkers to communicate in a style similar to text messages. On July 15th, 2006 Twitter was introduced to the public. In the first few months users sent 20,000 tweets per day. This number grew to 60,000 in 2007.

After receiving so much recognition at the South by Southwest Interactive conference, Twitter started becoming well known in the social media world. The website started seeing 300,000 tweets per day by the year 2008, which grew to 50 million tweets per day by early 2010. Not only did this social media platform become a hit with people who wanted to share messages with friends—it also became one of the easiest ways for companies to advertise and interact with their customers. Soon, TV shows and businesses started promoting hashtags and encouraging consumers to include them in their tweets, while Twitter handles quickly became an identifier used in personal and professional settings.

5. Differentiation

Twitter does not share much in common with other social media platforms. I vision Twitter more as a search and discovery platform. As our world evolves and technology takes over our lives, we each are given the power to curate a never-ending incoming stream. Twitter gives each user that power while simultaneously improving connections while maintaining low commitment: followers, not friends. This makes connection much more organic and viral. I get weirded out when someone tried to ‘friend’ me on Facebook, but I call it a small victory when someone ‘follows’ me on Twitter. Twitter successfully gamifies network creation at the fundamental user level. This is the core differentiating factor for Twitter.

We can see Facebook playing around with this: suggested friends, “You may know this person”, etc. We can also see Youtube doing the same with their version of short videos or “shorts”.

Facebook, YouTube, and the rest are a little too slow. Twitter owns the evolution game (right now at least) which will push them further up the totem pole. Will they overturn Facebook? We’ll see.

6. Competitors

The current environment for Twitter is scary, but unnecessarily so. Youtube, Facebook, TikTok, and SnapChat all have a different function than Twitter. The only one that comes close to competing with Twitter is Instagram, where professionals and brands have their own accounts that interact, from an experts platform, to their potential customers.

Facebook remains the dominating social media platform with 2.7 billion active users while Twitter only has 353 active users by comparison. See image below:

However, this is not a cause for concern but a point of opportunity. Twitter has room to grow significantly. The substitutes are already there, yet Twitter will not die. When we dive a little deeper we see why. Here are the reasons people use social media:

“Stay up to date with news and current events” is where Twitter shines. No other platform has the experts and world leaders under one roof, engaging with the rest of us. If people want to know what Trump, Obama, or Biden just said, they go to Twitter. Not Facebook, or any other social media app. Twitter is the ‘currently happening’ app.

There is one major worry here, though. Facebook is making moves to enlarge the norms for peoples social circles. We see this with “suggested friends” and now showing up in notifications. Facebook is evolving, deliberately, to absorb the spot that Twitter has made for themselves. Thus the ramping up of the great innovation race.

“What is the great innovation race”

The great innovation race is the era of technology talked about at https://a16z.com/2011/08/20/why-software-is-eating-the-world/

Threat of New Entrants

As code becomes more powerful, and seemingly new companies experience meteoric rise in the markets, it is a very real possibility that a new company will come to the table, better able to fill the role that Twitter has assumed for itself. The thing about this is, Twitter has evolved over almost a decade. I do not know how to code, but I imagine that it is not easily replicated or improved upon. This combined with Twitters rate-of-innovation is staggering. Jack and Twitter are in a good place with this speed, almost untouchable by new entrants. This is even more so with the introduction of recent features (tip jar, etc.).

Note: any new feature or competitive advantage in code can be quickly adopted, as we saw with the new app Clubhouse, a voice-only public chat. Twitter quickly adopted this feature with ‘Twitter Spaces’ and how Clubhouse is almost dead. See Clubhouse installs:

It’s worth repeating:Any competitive advantage in code is quickly adopted by larger players. We ultimately get the heavyweights (Facebook, Google, and Twitter) slugging it out for user attention while the newer smaller companies get smashed.

Bargaining power of suppliers

From Twitter Inc’s comments on Supply Chain:

Twitter is composed of a set of core, scalable and distributed services that are built from proprietary and open source technologies. These systems are capable of delivering billions of short messages to hundreds of millions of people a day in an efficient and reliable way. Twitter’s Scale. Tweets are delivered to users via the twitter.com website, through over a dozen owned and operated Twitter applications, and through widgets that appear on third party websites. Each time a user creates a Tweet, it is delivered to each follower of such user that requests a timeline. If a follower then retweets it, the Tweet is delivered to each of their followers who request a timeline. In addition, we deliver to users any Tweets that may be generated through our trends, search or Discover functions. This process requires our infrastructure to collect and efficiently deliver large volumes of information daily. Real-time, Service Oriented Architecture. Twitter’s architecture is optimized so users perceive instantaneous change. The time between a Tweet being created and having it available for users to see and interact with in the product is measured in tenths of a second. In general, the latency between two events occurring in our infrastructure is measured in millisecond increments. Foundational Infrastructure and Data. Our customized technology replicates and balances this data across multiple geographically distributed databases and allows us to store, access and modify it at scale. Relevancy and Content Analysis. We have built systems and algorithms to organize content to enable users to find and discover the most relevant content, people and topics on Twitter. Our key technologies include a distributed, fixed-latency, high performance search system that allows us to efficiently index, retrieve and score users and their content in real time. We have also built a trending platform to determine trending topics on Twitter. Advertising Technology. Our advertising platform allows advertisers to reach users based on many factors, including their Interest Graphs. We use sophisticated algorithms to determine the likelihood of user engagement with specific ads. We use these algorithms to match advertiser demand with Twitter users by placing Promoted Tweets and Promoted Accounts into a user’s Twitter experience in a way that optimizes for both user experience and the value we deliver to advertisers.

More:

Twitter is a business characterized by rapid technological change, frequent product innovation and the continuously evolving preferences and expectations of people on Twitter, advertisers, content partneers, platform partners and developers. We face significant competition in every aspect of our business, including from companies that provide tools to facilitate communications and the sharing of information, companies that enable marketers to display advertising, and other online ad networks, exchanges and platforms. We also compete to attract, engage, and retain people who use our products, and to attract and retain marketers, content and platform partners, and developers. We have seen escalating competition for digital ad spending and expect this trend to continue. We also compete to attract and retain employees, especially software engineers, designers, and product managers. (10-k)

It looks intense because it is. The rivalry between Twitter, Facebook, Google (YouTube), Microsoft (LinkdIn) is palpable. Twitters has the advantage though. By carving out the space of “Twitter is what’s happening and what people are talking about right now” they have created a space where more connections happen between more people. The norm for Facebook users is a few groups and friends. The average Facebook user has 338 friends, they only consider 28% of their friends to be genuine or close. You can see the language that Facebook uses “friends” vs Twitter’s “followers” is a benefit for Twitter. Connections are less serious, and more likely to take place through Twitter than on Facebook. If someone we don’t recognize on Facebook tried to add us as a friend, we turn it down. (Most of us, anyway) while on Twitter the entire game of “getting more followers” attracts all sorts of cases of people playing “the twitter game” to the benefit of the entire network.

7. Suppliers

Twitters main supplier is Akamai Technologies Inc.

Akamai provides services for accelerating and improving the delivery of content and applications over the Internet from live and on-demand streaming videos to conventional content on web pages to tools that help people transact business. Our solutions are designed to help businesses, government agencies and other enterprises enhance their revenue streams and reduce costs by maximizing the performance of their online businesses. By advancing the performance and reliability of their websites, our customers can improve visitor experiences and increase the effectiveness of their Web-based campaigns and operations. Through the Akamai EdgePlatform, the technological platform for Akamai’s business solutions, our customers are able to utilize Akamai’s infrastructure and reduce expenses associated with internal infrastructure build-ups. (Link)

From their website:

Akamai is the pioneering leader of the intelligent edge and makes digital experience fast, intelligent and secure for the world’s leading brands.

Akamai’s globally distributed intelligent edge platform surrounds everything, from the enterprise to the cloud, so our customers and their businesses can be fast, smart, and secure. And Akamai’s portfolio of edge security, web and mobile performance, enterprise access, and video delivery solutions is supported by unmatched customer service and 24/7/365 monitoring.

Akamai serves the leading financial institutions, e-commerce companies, media & entertainment providers, and government organizations. 

8. Industry Trends

In 2007 Steve Ballmer, a Microsoft executive, laughed at the iPhone. He said “Five hundred dollars?! Fully Subsidized? With a plan? I said that is the most expensive phone in the world!” He went on to say the iPhone would not succeed, stating that a physical keyboard was necessary. Social media is in the same boat. It is growing and encompassing more genres. Just as we don’t say “social media-ing with Tom” we say “I’m talking with Tom on social media.” Soon it’ll simply be “I’m hanging out with Tom.” I think Steve Jobs understood this with the iPhone.

Let’s look at the growth of social media around the world:

Technology, and more importantly, our role with technology is not even coming close to a mature state. As we unlock new ways of interacting with the world, each other, and the technology itself, we will spend more time in a meaninful way connected to each other. I am extremely bullish (positive) on the future of the industry.

9. Business Quality

📝 A note on quality:

“Quality, in the broadest sense, is “fitness for purpose”: Does the offer deliver the intended benefits, and is it suitable for use in the intended Environment? Quality is often subjective—some aspects, like manufacturing Tolerances, can be measured, but fuzzy factors, like “Does the end user like using it,” are more difficult to quantify.” – Josh Kaufman

As of Q2 2021 Twitter has a sustainable competitive advantage: innovation-per-year. This is a must in any technological business, and more so in social networks. Twitter is at the forefront. They will continue to be at the forefront as long as Jack and his team can push out new innovations, not just new features.

One way to see the value of this is the upcoming price of Twitter.

The new model, dubbed as the Twitter Blue, will allow users to enjoy privileged services like taking back of tweets, as well as shelving and managing favorite tweets. The social media site’s venture for the said idea was unveiled by its CEO, Jack Dorsey, last year. After its recent possession of Scroll, Twitter’s vice president Mark Park said through a blog that Scroll “will become a meaningful addition to our subscriptions work as we build and shape a future subscription service on Twitter.” While users of the said platform increases, it is understandable that the company seeks other ways to turn its service into profit. https://sftimes.com/twitter-plans-to-charge-3-monthly-subscription-for-exclusive-services/

Twitter is in the Internet Industry, and thank goodness! I am extremely optimistic about the internet and the entire industry as a whole. We have only begun to tap into the power of the internet, and thus have only begun to see what companies like Twitter are capable of. That is why my entire thesis evolves around evolution. Check this out:

Almost 60 percent of the planet is on the internet. I think we will get to near 100 percent in the coming decade. The internet is a great industry to be in. It’s where work, play, and people are. Last note: I don’t have to tell you that the evolution of the internet, over time, has been exponential. It happened slowly, ridiculed. Then a little more. Then, seemingly, all at once. And it’s not over.

How Twitter evolves

Twitter has recently taken the stance of evolution-first, a stark contrast from their previous ‘one improvement every 5 years.’ These singular evolutions are miniscule on their own, but they are paving the way to become a “platform killer” that combines newsletters, youtube, and even podcasts:

  • Revue – Long form ad-free service

  • Twitter Spaces – voice-only hangouts

  • Tip Jar – (currently) one-time donations to your favorite accounts

  • Track comments through retweets

  • Improved cropping of images

  • Fleets – Instagram copycat of short-form videos that disapear after 24 hours

  • Limit who can reply

  • Schedule tweets on desktop

  • Audio-only tweets

  • List search

  • “Add tweet” to create threads more easily

It’s not an easy shift going from a slow evolution where everything must be just right to evolving quickly and embracing hiccups. That’s why Twitter has deliberately shifted their entire brand to one of “Imperfect, by design” This will also help shift users from the binary choice of polished account or ‘lurker’ (user who never posts or interacts) to a more conversational philosophy.

Jack first made Twitter as a tool that he and his friends could use with an emphasis on advertising. To date, advertising brings in roughly 85 percent of all revenues. This current evolution rate will quickly shift Twitter from a legacy advertising model to a much more targeted advertising model. It’ll be much more user-friendly and advertiser-friendly. People will see more relevant ads, thus creating a win-win-win environment for advertisers, users, and Twitter. Look for Twitter to capture payment details for users and then use that data to improve advertising efforts. It’s coming.

Back in 2011 Twitter updated its sign-up process to allow new users to modify their account and then show those new users what Twitter was capable of; a tour of features.

(I’m still thinking about business quality, and how to measure it in the digital age. I think evolution is a large part of what makes a quality business.)

10. Leadership

From Ned Segal: “we believe Twitter has two massive market opportunities in both audience and revenue.” “we believe Twitter is capable of serving billions of people daily.” “we have a $150 billion TAM in digital advertising, yet just 3% share today. That translates into enormous runway for growth. Consequently, we’ve set bold ambitions and a clear strategy on how we’ll achieve that. In order to realize our mDAU and revenue ambitions, we will double development velocity by ramping our investment in our technology and our team. We’ll focus on adopting external technology solutions, modularizing our architecture and increasing the pace of experimentation and learning.”

Twitters strategy falls into 3 areas: health, interests and conversations. One of the main risks, according to Twitter, is “if content on the platform is rife with spam or misleading information, people won’t trust the integrity of the platform. Mitigating these risks is critical for us to create the best experience for our customers and ultimately critical in supporting our growth.”

Jack is a manager who has grown into a leader, who does things like tweeting during congressional meeting, and pulling the trigger on features much faster than before. “Development velocity” mentioned 21 times at Twitter’s Investor Day. Jack and his team have delivered on this promise over and over. Let’s see if they slow down (I don’t think they will).

There’s two kinds of leaders: missionaries and mercenaries. A mercenary is there to get paid. A missionary is there to complete the mission first. Jack is a missionary. I like investing in missionaries. Jack also has a significant portion of his net worth invested in Twitter, another sign that I like.

One thing I do not like is the embrace of ‘health and safety’ in speech on the platform. It feels Orwellian to me. I understand, however, that it cannot go unchecked. A completely open platform goes to shit pretty quick, if checks and balances are not put in place. This is a reality not worth fighting against. (And the alternative may be worse).

The overall leadership at Twitter is good, not great. I am frustrated with Jack, and impressed with the rest of his team.

11. Valuation

In order for Twitter to be successful it must gain new users and retain them, then show them ads while those users use the product. (It’s important we state the obvious, so that ‘we can point at it with our brains’). Their key metrics show this.

Our key metrics are Monetizable Daily Active Users (mDAU) which are “people, organizations, or other accounts who logged in or were otherwise authenticated and accessed Twitter on any given day through twitter.com or Twitter applications that are able to show ads. We believe that mDAU, and its related growth, is the best way to measure our success against our objectives and to show the size of our audience and engagement. Average mDAU for a period represents the number of mDAU on each day of such period divided by the number of days for such period. Changes in mDAU are a measure of changes in the size of our daily logged in or otherwise authenticated active total accounts. To calculate the year-over-year change in mDAU, we subtract the average mDAU for the three months ended in the previous year from the average mDAU for the same three months ended in the current year and divide the result by the average mDAU for the three months ended in the previous year. Additionally, our calculation of mDAU is not based on any standardized industry methodology and is not necessarily calculated in the same manner or comparable to similarly titled measures presented by other companies.”

In three months ending December 31, 2020 Twitter had 192 millionn average mDAU, an increase of 27% from three months ended December 31, 2019. Keep in mind, as Twitter evolves and adopts more features, more users will embrace Twitter. See the graph below from their 10-K:

The other main key metric is Ad Engagement plus Cost per Ad Engagement. See below:

One thing to keep in mind here is that Twitter does not publish its total users, due to the fact that many people have many accounts. Instead, Twitter tracks monetizeable users. This is good, but a pain to compare to competitors.

For valuation I am using EV/EBITDA. You can see below that Twitter has a much higher multiple than Facebook does, showing Twitter to be much more expensive, relatively, than its competitor. Twitter is at 48.7x and Facebook is at 18.6x. 📝

Investors mainly use a company’s enterprise multiple to determine whether a company is undervalued or overvalued. A low ratio relative to peers or historical averages indicates that a company might be undervalued and a high ratio indicates that the company might be overvalued.

12. Cash Flow

Here is Free Cash Flow to Market Cap Yield comparison between Facebook and Twitter. Twitter is at 0.44% compared to Facebook at 2.60%. This is pretty abysmal for Twitter.

Want to know more about FCF Mkt Cap Yld? 📝

Free cash flow yield is calculated in comparison to the company’s size, or market capitalization, usually referenced as “market cap.” The higher the free cash flow yield is, the more the company is generating cash that can be quickly and easily accessed to satisfy its obligations.

Larger companies are often more likely to show a higher cash flow yield. However, it is not always the case. The lower the free cash flow yield, the more money investors are pumping into the company with less to show for their efforts.

Depending on the size and nature of a company, financial analysts can typically determine if certain investments are the root cause of a low cash flow yield, specifically when compared with the company’s capital expenditures.

13. Catalysts

“What will drive the stock price up?” The answer to this depends on your time horizon. I am not one to buy-and-forget, but I am also not one to play the quarterly game.

What drives Twitter higher in the long term will invariably be their ability to deliver on their promise of connecting people and ideas in meaninful and interesting ways worldwide.

It’s easy to make it more difficult than it needs to be, but we must make this as simple as possible, but not oversimplify, which I fear I may have already done.

14. Risks

One of the biggest risks isn’t YouTube or Facebook or any other external threat, but internal weaknesses. Twitter has a real danger of becoming a bloated app that cannot do any one thing very well, but many things in a sub-optimal way.

I notice this with other super apps (like Facebook and YouTube app) but they seem to be absolutely crushing it. But just because competitors are doing well with this model doesn’t mean Twitter will do the same. We see most major platforms adopting the same new features: voice, long form, and creator economy tools, but the risk of not putting the tools together in an aesthetic way is real.

The second main risk is Twitter fizzling out of the great innovation race. If this happens it will only be a matter of time before another player adopts search and discovery as the main world player. (We can see Facebook playing around with discovery by “suggesting friends”)

In terms of risk, I am more concerned with the output of the company, not the internal shifts. If Jack leaves it could be just fine, or even a good change. It’s the value to users that matters.

15. Opportunities

Twitter is in a sweet spot where it can gain needed features through mergers and acquisitions (M&A) to strengthen the connection of nodes in the network. So, instead of you and I being connected via tweets, we will be connected via voice, tweets, long-form, video, tips, super-follows, etc. The more ways we can connect, search and discover, the better Twitter will be, and the more value created for all stakeholders.

The management team’s motivation to grow the business is survival. We are at an interesting time where a small company can get funded and rise up relatively quickly, due to the interconnectedness of humans on the internet. If Twitter cannot or will not give these features and innovation to users, someone else will. These managers know that at a fundamental level. Innovate or die.

Historically, growth has not been sustainable (lackling mDAU growth and free cash flow growth show this) but this primes Twitter for a reasonable launchpad.

Look at the ARPU (Average Revenue Per User) above. That number will go up with the evolution that Twitter is pushing. It doesn’t take imagination to see that.

I briefly spoke with Elliot Turner about the opportunities that exist for Twitter. He agrees that the “2nd order effect is that the more opportunity creatives have on Twitter the more they will engage on Twitter. The more people engage on Twitter, the more it brings people to the network. The other big one I’m intrigued by is that these new ways to engage are inherently more accessible than the feed itself, so it reduces onboarding friction. Lastly, getting credit card info from users creates opportunities in advertising-very excited about it.”

16. Conclusion

Irreverent Rating: ⭐⭐⭐⭐

The evolution of Twitter makes sense, but how long can they keep up the innovation race? Jack is either a newly strong leader or faking it. If Twitter gets payment details of users, improves ads, and helps majority of users monetize, then we have a power app. Is it a long shot? We’ll see.

17. Portfolio Update

As of 5/28/2021 I am initiating a 1% position in Twitter. I find it fascinating with uncommon asymmetrical upside.

18. Notes

  1. The main way I think about these businesses is very similar in the way I thought about my own small business. Solve the problems of the customer. It doesn’t need to be more complicated than that.

  2. Twitter put out a big presentation, called ‘analyst day’, where they had a bunch of speeches by top-level leaders. Cool powerpoint slides, graphs, and lofty goals were the mainstay. I only care about goals long enough to learn the how those goals will be reached. “We are going to double our user base” Neat. Tell me how, and then show me.

  3. If you notice any errors or if you have any questions or concerns please comment below.

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None of this is investment advice. The Irreverent Investor and Michael Walsh is strictly for education and entertainment purposes only. Michael Walsh is not a financial professional. Do your own research and due diligence. Consult a financial professional before making any investment decisions. Don’t be a doofus. Come on now.

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