Twitter – Big fish, small pond.

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Dedication and focus needed to reach the big pond.  

• It is important to run a tight ship but simply cutting jobs is often the action of a company that does not know what else to do.
• It looks like Jack Dorsey’s first action as the permanent CEO of Twitter will be to make a series of job cuts including some of the engineering staff.
• What I would have preferred to see is the removal of engineers from the mature part of the business and their re-employment on the big new strategy that will bring Twitter back to growth.
• Simply getting rid of them makes it look like that the big new strategy to return Twitter to growth does not exist.
• No strategy means that 2016E’s consensus estimates of 44% revenue growth looks way too high.
• Twitter has two main problems:
  • First: Its current business opportunity of monetising tweets looks mature and revenue growth from here will be challenging.
  • The main reason for this is that Twitter addresses just 16% of the Digital Life pie with its services (see here).
  • This means that its monetisation opportunity is fundamentally limited because it does not address the other 84% of things that users do with their smartphones.
  • This is why I believe that its growth has ground to a halt although the monetisation of the usage that it does have is first class.
  • Second: Jack Dorsey has the heritage of being resourceful and inventive enough to fix Twitter, but as CEO of two companies, I think he lacks focus.
  • Twitter needs to do something very different in order to expand its addressable market and I not doubt that Dorsey can up with a winning strategy.
  • However, this strategy will need the dedication and focus of its leader to make sure that it succeeds.
  • As CEO of Square, Jack Dorsey is leading the company to IPO and will have far more on his mind than just fixing Twitter.
  • This is why I am unhappy with his appointment as permanent CEO and why I have concerns that Twitter’s strategy for recovery will not be well executed.
• The net result is a big fish in a small pond that is going to have difficulty jumping into the big pond.
• Consequently, I see no reason why revenues in 2016E should grow 44% and would be looking for something much more pedestrian.
• It is on hopes of this recovery in growth that Twitter trades on 90.7x 2015E PER and 49.8x 2016E PER which looks far too high when compared to Facebook on 45.0x 2015E PER and 33.9x 2016E PER.
• Facebook, itself is not cheap but its strategy to become a fully-fledged ecosystem rather than a social network is well defined and the path towards execution of that plan is well laid out.
• I have much greater confidence in Facebook’s long-term strategy than Twitter’s and as an investor I only have to pay half the price for it.
• There is no contest between the two in my view.