Twitter on steroids

Twitter is on a roll. This last quarter they announced a 21% increase in mDAU (monetizable daily active users), which was a record number compared to their usual 3-4%s and Facebook’s average of 2%.

Despite its high growth, Twitter’s PE ratio (hovering around 15%) is half of Facebook’s. The only explanation to that is Facebook’s QoQ (quarter over quarter) revenue growth is, on average, 7% vs. Twitter’s inconsistent 4%, and the market values social media companies based on their solid revenue numbers rather than mere users.

Jack Dorsey’s Africa presence this year is symbolic, but it is an indication of Twitter’s relentless pursuit of aggressive user growth. So I see no problem there going forward, mainly because after quarters of their stalled user base situation, most bots are now gone, and it’s less of an issue in Twitter’s reported numbers.

Going forward, what Twitter should focus on is its ARPU (average revenue per user.) Currently Twitter is making $1.8 per active user per month vs. Facebook’s $14. That’s because;

  • Facebook’s ad sales force is beefier, they have more inventory
  • Facebook Platform comes with more depth; an active user is engaged not only on Facebook, but also Messenger, Whatsapp, and Instagram properties.
  • Facebook services cumulatively have more demographic/personal information than on Twitter alone; so targeting can be more accurate.

The question remains, in light of these harsh realities, how can Twitter manage ramp up its ARPU? In my view, here’s the formula (and there goes the ideas as well:)

1. Google-esque intent-driven ads

While Twitter dominates perhaps the world’s largest interest graph, to my experience (and surprise,) Twitter’s ads are super-irrelevant, not only to tweets that I consume but also to the ones that I produce.

There’s definitely an opportunity to increase relevancy but it’s probably more of an inventory issue at this point, rather than technology.

Google, for example, shows intent-related ads when you input your search query, and they are extremely relevant. Twitter could show similarly relevant ads after each tweet, but it doesn’t. I don’t know why not.

2. Bigger Ads

Social media is not Search; it’s already full of multimedia contents, so it seems to be okay to bloat the pages with multimedia advertising.

Facebook, Snapchat and Instagram show ads that sometimes cover the whole page (and dominate your attention) for a significant period of your time on the apps. Twitter, on the other hand, shows a limited amount of sponsored tweets, and they only cover 1/3rd of the real estate on the screen.

I am not suggesting Twitter to change their ad formats immediately, but it certainly is a potential improvement area that the users would tolerate, based on our experience from other social media behemoths.

Overall, it appears that Twitter is acting very conservatively in great fear and responsibility of alienating its user base. For Facebook, Instagram is yet another property to extract value, but for Twitter, the site is vital, so they’re extra cautious in any move they make. The rationale is, they can always sell the company as it is, regardless the revenues, and harvest — that’s as long as the user base remains intact.

Overall, I think, for the reasons stated above, Twitter is highly undervalued, and it is awaiting a big correction. The company is a rare (if not, the only) hope against Facebook’s dominance in social media, and that alone is an inherent strategic value that should be taken into account. Meanwhile, Twitter is doing the right move by focusing on its userbase, cleaning up the bots, ensuring a healthy ecosystem.

Also, for the same reason, it would be a mistake on venture capitalists’ part to consider social media as a done deal and ignore the dealflow there. I expect Twitter or Snapchat (or a combination) to become a major force against Facebook in not so distant future, so any innovation in the social networking world could still hit the jackpot regardless of how much cash they bleed right now.

Disclaimer: The Content is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice. Nothing contained here constitutes a solicitation, recommendation, endorsement, or offer by me or any third party to buy or sell any securities or other financial instruments in this or in any other jurisdiction in which such solicitation or offer would be unlawful under the securities laws of such jurisdiction.

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