– TWTR doesn’t have a user problem – it has a registration problem, and it’s taking steps to fix it. Meanwhile, it has the most easily monetized platform this side of GOOG search.
– Adjusted for change in the integration of iPhone users, MAUs accelerated to 21.7% YoY growth, with initiatives now rolling to improve onboarding of 500M monthly anonymous visitors
– Attractive demographics, unique interest graph, powerful native formats, off site reach, multi-media integration very attractive to advertisers. Ad density and pricing have LONG runways.
– Our model still shows upside to $70+ on strong revenue growth and margin expansion going forward. Resolution of MAU controversy can catalyze a significant rerating.
4Q14 was a lot like most other recent Twitter quarters in many respects. Revenues were up 97% YoY against a tough compare and smashed consensus expectations. EPS, setting aside the big chunk of employee stock compensation, was a solid $0.12, doubling consensus on strong 30% EBITDA margins. Reported monthly active users (MAU) was seemingly disappointing at just 288M, up only 4M from the 284 reported the previous quarter. In the past, this was enough to crush the stock.
Not this time. That disappointing MAU number was effected by a change in Apple’s iOS 8 that hit Twitter MAUs by 4 million users. Absent that, those MAUs would have been okay rather than poor, with the promise of acceleration as some of the flurry of product initiatives that company is rolling out begin to take effect. Management suggested that net user growth over the next few quarters would likely be in the teens of millions, no doubt a further comfort to the MAU obsessed contingent.
Beyond users, Twitter delivered again on monetization, and perhaps investors are beginning to appreciate just how much opportunity the company has in front of it. While Twitter has a modest fraction of the registered MAUs at Facebook, the population of MAUs that it has is demographically attractive to advertisers, skewing young, skewing technologically sophisticated and skewing wealthy. On top of attractive demographics, Twitter has a very strong data set based on the accounts that each user follows, the tweets with which they interact, and their own tweeting activity. Moreover, Twitter has evolved into a powerful native advertising vehicle – its ads are tweets that seamlessly flow into user timelines with a rich array of media formats, including the newly introduced native video card. The increasingly rich mix of ad formats has already begun to drive average ad pricing and should continue do so going forward. Finally, Twitter’s increasingly close partnerships with media companies and entertainment properties are building synergies for advertisers looking to integrate campaigns across traditional and digital media.
Another change is a concrete plan to monetize those anonymous users that do not log in to the service. Deals with Flipboard, Yahoo Japan and Google suggest a potentially lucrative path forward, along with a new content intensive landing page that will present compelling timelines with ads to visitors. The format of Twitter’s ads as familiar tweets makes it easier for the company to integrate paid content into its syndicated partners. Twitter’s MoPub exchange is also proving to be an excellent vehicle for placing ads onto 3rd party mobile apps based on Twitter’s targeting data and technology.
When we model revenue for Twitter, we see long runways for the company to expand its advertising density and to earn higher ad prices. Current ad load factor in timelines, while up YoY, is still less than a third of the way to the target of 5%. Ad pricing, driven by supply and demand in Twitter’s auction based platform AND by the engagement of users with advertising (N.B. Twitter only charges for ads with which users interact), is up 10% YoY in the quarter. We believe that the introduction of 30 second native video advertising, e-commerce ads and other innovative formats will have an ongoing and dramatic effect on ad pricing. We are modeling a 3% CAGR in pricing and a 350bp increase in load factor over the next five years.
On the user side, we expect MAU growth to accelerate very slightly from the current ~20% range over the next 5 years, driven by the dramatically improved onboarding process and the secondary impact of content partnerships with Google and others. We are also modeling engagement, as measured by the ratio of daily active users to monthly active users (DAU/MAU), to increase by 6 percentage points to 54% by 2019.
Looking across all of these levers, we believe that ad revenue could hit $2.5B for 2015.With monetization efforts for logged out users gathering steam with recent deals with Yahoo Japan, Flipboard, and Google, we are modeling Data Licensing and Other to be up 100% next year reaching $294M, making our overall view a little more bullish that the company’s FY15 guidance band of $2.3-$2.35B in revenue. In November, we published our valuation model for Twitter, which suggested a value for company of more than $76B, assuming a 15x year five sales multiple and a 25% discount rate. Based on this quarter’s results and the promise of the company’s recent product and partnership announcements, that valuation rises to $81.5B, or a 190% premium to the afterhours share price of $44.95. That sort of upside leaves an awful lot of wiggle room for our model to be wrong and still be right.
For our full research notes, please visit our published research site.