Why Twitter’s Future Is Bright

(NYSE:TWTR)

I wanted to share my research on Twitter, which has recently not received a lot of love from users and investors alike. I believe that Twitter is a valuable company and is currently undervalued at its current market valuation of $23 billion.

I do think that general market conditions or negative factors affecting the company, i.e. quarterly earnings or CEO search, in the short term may negatively affect the stock price. But the opposite may also very well happen.

The purpose of this essay is not to speculate on the stock price for the next three month, but establish that Twitter is a valuable company. For any investment, one needs to understand if the business is a good business and if it is cheap. There are lot of listed companies that have a cheap stock price, but they don’t have a good business. In fact, there is nothing worse than buying a bad company at a cheap price.

What separates a good from a bad business is subject for another topic. A good business provides a valuable service that consumers can’t live without. A good business has as Warren Buffett says a moat, so that other companies cannot easily take away market share. There is more, but this is topic for another essay.

First, I want to acknowledge the criticsim that has been made. Indeed some of it is quite valid, but since markets are forward looking mechanisms, my idea is to comment how these criticism might be resolved in the future.

In many ways the discussion around Twitter reminds me of the many people that doubted Facebook’s ability to monetize when its share price hovered around $20. Today, at $245 billion, Facebook has more than 10x the market capitalization of Twitter.

As Elon Musk said at a speech in 2013, sometimes running a public company sucks. Wall Street scrutinizes your company every quarter, and has very little patience if things don’t work out right away. Net income over the past four years for Twitter has been far from what investors were hoping for, but if you look at revenue, the story looks better.

Why else might you be worried? Some high level executives have left the company. For example, Rishi Garg, Twitter’s Vice President of Corporate Development left in June after only joining last year. On July 1, 2015, Adam Bain, President of Revenue, sold 30,500 shares. If you believe that employees have the best information, you might be worried.

.@Twitter. Who Do You Think You Are?

The most recent and strongest criticism has come from New York Times’s Nick Bilton. It is fair to say that Bilton knows more about Twitter than most people. In essence, Bilton’s main criticism is Twitter’s conflicting vision. “This company is a mess,” he told CNBC last week. “When people say they are not on Twitter and they ask me what it is, I don’t know what to say.” He wrote that about half of the board of Twitter barely tweets, and that the product hasn’t changed in nine years. These are all fair points, yet you can still be bullish about Twitter’s future.

What’s Not Going Well At Twitter? (According to Chris Sacca)

1. New user growth has stalled.

2. Almost one billion users have tried Twitter and not stuck around.

3. Direct response advertising has fallen short of hopes.

4. Wall Street’s confidence in the management team has diminished.

5. Twitter has been unable to convince investors of its potential upside.

In other words, as Sacca goes on to explain, Twitter is too hard to use, too scary and feels lonely. But I think all these things could be fixed if there is better management in place.

Chris Sacca’s summary:

Twitter’s biggest challenges today are its slow-growing user base, its high number of inactive users, and a product flow that makes direct response and commerce transactions challenging. All of this is compounded by Twitter’s unsuccessful attempts to convince investors and the public that it has a clear vision and product roadmap that will accelerate growth. The stock price reflects the resulting misunderstanding and doubt.

Twitter is an ocean of rich data

One big problem is incidentally where also Twitter’s big value lies. At a recent AMA by Chris Sacca, the biggest investor of Twitter, I asked him the quintessential Peter Thiel question. What is an important truth about Twitter that few people understand or see? He said that few people understand that no matter who you are, there is stuff inside Twitter that is incredibly interesting to you.

Twitter is like a big ocean. It has so much rich content, but there is also a lot of useless content. Every second there are 6,000 new tweets. That is 500 million tweets a day, or 200 billion tweets a year. There is a lot of noise, and currently Twitter is not doing a great job going through this noise to surface the good content.

“Everything that is happening is happening on Twitter. Every game, every show, every debate, every war, every storm, every ceremony, every tragedy, every election.” — Chris Sacca

Navigating through this big ocean is difficult, however, and can seem daunting, especially to new users. It doesn’t seem to hard with good management to find better ways to attract users, and make the service more useable in that way.

What Is Going Well At Twitter ? (According to Chris Sacca)

1. The pace of product development has accelerated dramatically.

2. Twitter has shown a willingness to take more risk in making changes to the core product.

3. Revenue is growing at 74% year over year. (There is no public company of that scale growing anywhere near as fast.)

4. The management team has stopped selling their stock.

5. The Google deal is a big win.

6. Periscope and TellApart are strong acquisitions. (Periscope may prove to be the most important deal Twitter has ever done.)

Curiously, Stewart Butterfield explained Slack’s early strategy lately, and mentioned one good point what makes Twitter valuable:

We bet heavily on Twitter. Even if someone is incredibly enthusiastic about a product, literal word of mouth will only get to a handful of people — but if someone tweets about us, it can be seen by hundreds, even thousands.

It is those tweets by government officials or journalists that show how important Twitter has become when they use the 140-character communication utility as their preferred communication platform.

And that’s what Twitter is above all, a communication utility. It is not just a social media platform. Twitter is so integrated into the global economy that all people from politicians to diplomats, from artists to journalists rely on the platform as a way to communicate. In other words, Twitter has become an indispensable part of the public sphere.

In a recent interview of Dick Costolo, former CEO of Twitter, The Guardian nicely prefaced the value of Twitter:

As Twitter developed and became a product of the world, access took on a more ambitious, more significant meaning. It started to represent the democratic ideal of access for all. It applied to people who didn’t necessarily know each other, who might not be in the same country, same political spectrum, or same socioeconomic condition.

Twitter is also a search engine, a social search engine, even if search on Twitter doesn’t really work as easy as it should. Many people turn to Twitter for live events. For example, the Greek referendum is a good example. Indeed the use of the hashtag signifies the value of real-time events. This is the other big value, and the acquisition of Periscope will help Twitter achieve a better way to capitalize on real-time events.

Here’s Chris Sacca again, this time on the value of real time events:

“So much relevancy and value can be inferred by the sender’s location. A Tweet about a protest would take on increased importance if you could see that it was sent from Baltimore or Ferguson. Tweets about the Super Bowl are that much more thrilling when we know they come from inside the stadium. In the midst of earthquakes and storms, Tweets have so much more value to us if they are written by others nearby.”

Chris Camillo, social arbitrage investor and author of Laughing at Wall Street, has developed an entire strategy on finding investment insights through going through thousands of tweets every day.

“I think Twitter primarily is a news system… rather than a social network, it was a real-time information network. I think the real value of Twitter that we have seen over the six years since then has been applications of that.” — Ev Williams

As Chris Sacca explained, Twitter needs to be more “effortless to enjoy, easier for all to participate, [where everyone] feels heard and valuable. The road to make Twitter more valuable is to make Twitter more valuable to more people. But the good thing is that all the content is already there.