Twitter Q1 19 – Smoke and mirrors

The switch to DAU hides reality.

• Twitter reported good results as its actions to stimulate engagement began to bear fruit but any notion that this is a return to long-term growth does not bear up to scrutiny.
• Q1 19 revenues / net Income were $787m / $191m ahead of consensus at $775m / $117m as product improvements drove users to spend more time with the service.
• However, the real excitement was daily active users (DAU) which increased to 134m up 11% YoY.
• This is what got the market so excited pushing the shares up 17% to $39.77 in after-hours trading, but this is misleading in my opinion as the market is inferring a sustainable return to growth.
• What I think is happening is normalisation after a period of poor performance.
• DAUs are a subset of monthly active users (MAU) which in turn are a subset of the number of devices upon which the app is installed.
• In many cases, the DAUs are roughly 1/3^rd of the MAU count but in exceptional cases like Facebook, it can go as high as 65%.
• In Q1 19, MAU was 330m a decrease of 6% YoY which is a reflection that the addressable market for Twitter has not returned to growth but simply that Twitter is once again doing a better job of engaging with the users that it already has.
• Twitter will no longer report MAUs as of Q2 19 which I take as a sign that it no longer wishes to make it obvious where its limitations lie.
• As of Q1 19, DAUs were 41% of MAU leading me to believe that unless Twitter becomes as indispensable as Facebook to its users, the DAU count will soon slow down after this burst of growth.
• Furthermore, over the last 2 years, Twitter has substantially underperformed Google in terms of monetisation which it is now beginning to correct.
• By RFM’s measures, Twitter has historically monetised between 80% – 90% as efficiently as Google which in 2017 and 2018 dropped to 60% – 70%.
• This has created an opportunity for Twitter to get back on track in terms of monetisation and it is the results of these efforts that we are now beginning to see.
• This normalisation will result in a period of growth which without the key MAU metric being disclosed, will be assumed to be long-term in nature.
• The problem is that Twitter has still not solved its fundamental problem which is to expand its engagement meaningfully beyond the small Digital Life segment of micro-blogging.
• Until it does this, the total user base is unlikely to grow and once this normalisation has been completed, stagnation will return.
• Hence, the ride should continue for a quarter or two and then holders should be looking for the exit.