Disclaimer: The following article is not investment advice. It simply only states my opinions.
Twitter is an interesting company to observe. For a long time I have had very mixed feelings about this social media platform. It is very easy to write it off and there are many reasons to it; chiefly one could argue that it is a toxic platform and has a negative effect on one’s mental health. From an investment point of view, there are additional reasons to be cautious. The company currently doesn’t have strong fundamentals and is not a cash generating machine in the same way that say Meta Platforms or Alphabet are. Even with its current share price more than 50% down from it’s $80+ high reached in February last year, it is a highly speculative stock.
However, when I look at Twitter objectively, I do think it’s model as a social media company, specifically how it’s designed, is unique and I would probably argue that Twitter is one of the most effective and powerful social media platforms to use if you want to get your voice or message heard instantly and to make some kind of noise. Traditional newspapers and journals will always have their place and there will always be a demand for quality content, yet for writers and journalists, Twitter is a much more powerful platform to get one’s message across than solely via a newspaper or blog. Twitter is the ultimate vehicle for someone not only to have their voice heard but to have it amplified in an exponential way.
The other thing that is interesting about Twitter is that almost every public figure uses it. Most people that matter and have something important to say are on it. Almost every person in government has a Twitter account. Almost every writer and journalist also has a Twitter account. The bottom line is that nearly every person who is outspoken is on this platform. For me, this is a very important sign and it reveals to me how powerful and disruptive this particular platform is.
Often I will value a company on its fundamentals in order to see what the company’s margin of safety is. Valuing something like Twitter is much more of an art. It requires truly understanding the platform, specifically it’s power and how it will develop as the internet continues to evolve. The fact that so many public figures, businesses and entities use the platform tells me that this platform clearly provides a lot of value and has very strong network effects.
Meta Platforms, which comprises of Facebook, Instagram and WhatsApp, currently has a market cap of just under a trillion dollars. Alphabet, the parent company for Google and YouTube, has a market cap of nearly $1.8tn. Twitter, on the other hand, has a market cap of just under $30bn. Some people may say that for a company that lacks the cashflow generation of Meta or Alphabet, a $30bn market cap is still very high. And they are not wrong. However, what if Twitter were really able to harness it’s power and become a huge cash flow machine? It is often said that it is important that a company still has its founder/s on board to steer the ship and provide a unique vision of how the company should be developing and operating. However, in the case of Twitter it is not unreasonable to say that it’s founder Jack Dorsey may not be the right person to really take the company to even greater heights. He was instrumental in the beginning phases of the company’s growth. Twitter still needs someone who is visionary and completely understands the company to take it forward, yet it also needs a mature, resilient and pragmatic leader and one who is able to realise and, more importantly, monetise all the company’s untapped potential.
Recently, Dorsey stepped down as CEO of Twitter. He was replaced by Parag Agrawal, who has worked at Twitter as software engineer since 2011. In 2017, he became the chief technology officer of the company before replacing Dorsey as the CEO in November last year. I could be wrong, but I sense that Agrawal will have a lot of success in cleaning up the image of the company and improving its credibility by cracking down hard on fake accounts and accounts where individuals and entities spread disinformation. I also think Agrawal will be serious in establishing ways to further monetise the platform and increase its user growth which has been sluggish.
Anyone who has studied the market performance of Twitter stock since it first IPO’d back in 2013 will know that the stock hasn’t really punched above its weight. Yet I think even if user growth continues to be a challenge, at least in the short run, I think the company has the potential to vastly increase its revenue. In Q3 21, the company generated $1.28bn in total revenue. I think there is the potential for the company to at least quadruple it’s total revenues from that point whilst still maintaining a healthy sized gross profit margin and keeping other costs like R&D, sales and marketing, and administrative costs at a reasonable level. If the company successfully pulls all this off, I would not be surprised if it grew into a market cap quite a few multiples from its current market cap of just under $30bn. I think in the next five to eight years, it is entirely feasible for the company to command a valuation of at least $150-200bn provided it makes big changes and succeeds.
By Nicholas Peart
(c)All Rights Reserved
1st February 2022