The controversy surrounding Twitter stock centers on user engagement and growth in monthly active users; clearly those metrics have disappointed. Yet advertisers flock to Twitter – ad revenue grew 125% year-over-year last quarter. What are investors missing?
1) Twitter is enormous and differentiated.
Twitter users post more than 500 million tweets per day. While still far from Google’s 3.3 billion searches per day, the number certainly meets the definition of critical mass.
This infographic circulated on social media blogs 2 years ago. If I were a donut brand, I can’t imagine paying more to make an impression on someone who “likes” donuts versus someone who is actually consuming donuts and is telling people about it.
2) Twitter isn’t Apple.
Twitter’s revenue model is misunderstood; there is an important distinction between Twitter’s users and its customers. Twitter has 255 million monthly active users (MAUs) but only thousands of customers. Twitter’s users are the product; its customers are advertisers. Multiplying MAUs by revenue per MAU is just math – it doesn’t forecast advertising spending. In contrast, Apple’s users and customers are the same. I expect 250 million iOS devices will be sold this year to 250 million users/customers. Apple revenues equal units times average selling price.
3) Twitter is the most valuable application I use.
I tell Twitter my interests through who I follow and it fills my newsfeed with information. It provides a forum to interact with experts. And Twitter allows me to create and promote my personal brand. Microsoft Excel and Google dramatically improve my productivity but neither approaches the utility of Twitter. Excel helps me synthesize the data I gather while Google provides answers to nearly any question I have. But Twitter is the most valuable because it opens my mind to questions I didn’t even know to ask.
4) You must customize Twitter to optimize its benefits.
a) If you curate your sources, they’ll curate your newsfeed. You’ll miss insights from low frequency tweeters unless you reduce the clutter in your feed. I follow a maximum of 200 users – if I add one, I delete one.
b) Don’t follow general news sources; instead follow the thought leaders, columnists and journalists you respect. They tweet and retweet items that interest you. My thought leaders in technology and business are @bgurley, @pmarca, @benedictevans and @erikbryn while I rely on @jguynn, @Jessicalessin, @waltmossberg, and @karaswisher for technology news and analysis. And @kasparov63 provides candid commentary on world affairs. For breaking news, I find an embedded reporter and follow him/her. I learn faster through their tweets and retweets and don’t fill my newsfeed with noise. @ChristopherJM and @Kateryna_Kruk are my sources for unfolding events in the Ukraine.
c) Follow CEOs as well as companies. I don’t follow company feeds at all if they use Twitter for customer support or self-promotion. When you follow CEOs, you learn about their personalities, either through omission or commission. CEOs who don’t tweet miss a tremendous opportunity to embellish their personal and company identities. Whomever you follow, see who they follow. It will tell you their interests and provide a source of new ideas. @spencerrascoff is the best I’ve seen. @levie, @elonmusk, @chesky, @travisk, @mlevchin and @tfadell also shine. Ironically, Twitter executives don’t take full advantage of their own platform – I’ve encouraged @dickc to raise his engagement.
d) I use Twitter almost entirely for work; mixing in sports teams and celebrities drowns out the news. Of course, I make exceptions for @ryanhunterreay and @HarlanCoben while @GoogleFacts and @HistoryInPics provide insights and amusement.
e) Twitter’s most engaged users both tweet and follow. I tweet because I aspire to be a tech-industry influencer; I’m building a brand. I don’t pay for followers, so my list grows organically. Being retweeted or favorited by someone with a broader reach stimulates an immediate increase in followers. At various times, I’ve gotten a boost from @kasparov63, @samasource, @colgateuniv and @pmarca.
5) Sentiment will change.
To reiterate, Twitter is the most valuable application I use. As others begin to appreciate its power, MAUs will grow, advertisers will spend and margins will expand. Facebook came public at peak margins at the beginning of its transition to mobile. The stock languished for a year before management’s investments began to pay off. Twitter is already mobile and already has in-feed ads. Revenue growth underscores advertiser commitment. Other user-generated content sites, TripAdvisor and Facebook have 40%-60% operating margins. Look for Twitter to deliver accelerating earnings growth over the next 12-24 months.