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The Upside and Downside of Twitter

Twitter is one of the rare companies that investors think should be performing much better than it currently is. Most investors in the company hold out in hopes that new management will enable the company to finally achieve its potential. The company is positioned between the areas of social networking and mobile computing, which are two of the fastest growing areas in the tech world.


Still, Twitter stock’s performance has proven to be a disappointment to investors. Twitter’s share price has rarely risen much above its IPO price of $26 when they were first traded in November 2013. In this time, the S&P 500 index (SPX) has gained about 7%, while rival social networking giant Facebook has gained 78%. In spite of its modest performance, many investors still expect fundamental growth and traders on the Option.FM trading platform, take advantage of the fluctuating price of Twitter’s stock to make profits.

Despite Twitter’s poor performance to date, the company’s adjusted earnings are expected to grow by 136% in 2015 to 33 cents per share. In the fiscal year 2016, profits are expected to rise by 85%.

Pro: Twitter Management
Investors who have bought the company’s stock are celebrating. This is because Jack Dorsey, Twitter’s co-founder, recently announced that he would be taking over on a full-time basis as permanent CEO, with his aim being to stop the decline in the value of the stock and maximize value for its shareholders.

Interestingly, Dorsey, who took over the reins as interim CEO as the price of Twitter was rapidly dropping from a high of more than $50 to less than its IPO price of $26, will also remain as the CEO of another tech company he founded, Square.
Pro: The Financials
Although Twitter disappointed Wall Street analysts after failing to meet their expectations for the first quarter this year, the second quarter earnings, which were the company’s first under Dorsey’s leadership, were significantly better. Revenues of $502 million were well above what was expected, and advertising revenues saw a 60 percent increase, netting Twitter $452 million.

Typically, Wall Street will reward stocks that are able to perform above expectations while punishing those that do not. The company’s recent performance clearly shows that Dorsey is better than Dick Costolo when it comes to managing investors’ expectations. Pundits have praised Dorsey for publicly acknowledging the biggest problem that Twitter faces: slow growth in user numbers. This makes investors confident that the company will fix the problem.

Pro: Social Impact
Regardless of the event – whether it is Beyoncé performing during the half time show at the Super Bowl, the Ferguson protests, the NBA Finals or the Soccer World Cup – Twitter is a site that draws people. The news of Prince William’s engagement was announced on Twitter by Buckingham Palace as well as the birth Princess Charlotte. Twitter was also first with the news of events like the Boston Marathon bombings and US Airways flight 1549, which landed safely on the Hudson River.

Con: Slow Growth in Active Users
Growing its user base is one of the key factors that will affect the price of Twitter stock going forward, when it is considered that this has been the single most disappointing metric when the company’s performance is measured against its main rival, Facebook. Twitter’s core user base – excluding fast followers who receive SMS messages – only rose by 19 million in the nine months before September 2015, to stand at 307 million. Other major social networking sites such as Snapchat, LinkedIn and Facebook grew much faster in this period.

However, all hope is not lost. Most analysts’ valuation models are forecasting that, due to innovative new products that the company is currently rolling out, the user base growth should start to accelerate. Most projections estimate that the overall active user base should have risen to more than 500 million users by 2022. Recently introduced innovations and improvements to the user experience – Moments, for example – should fuel significant growth.

Con: Underperforming Advertising Business
By using current price estimates, it is projected that the company’s ad revenues should jump by about 26% CAGR (compound annual growth rate) to hit the $8 billion mark by 2022. This projection assumes that the company will be able to raise its active user numbers, while increasing its ad load on the website. Investors who buy into Twitter are also expecting the company to exhibit growing engagement levels as new innovations to the platform are brought online.

The Final Word
A reason that Twitter is not yet as profitable as many analysts expected when it was first listed is that it has heavy investment in several new projects that will take some time to offer a return. For example, in April, the company bought the live streaming application Periscope for $100 million. The application is so good that Facebook also revealed that it was bringing on board its own live streaming service known as Live. Twitter also extended its deal with the National Football League for a further two years, allowing the micro-blogging website to provide more game highlights. With all this in the bag, we could start to see the numbers we expect from Twitter.

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