The Great FOMO Trade of 2020

Can the same investors who love Twitter the service come to love Twitter the stock?

Investors, media and power users love Twitter the service and regularly remark how they cannot believe the service is free. However, those same users also love to trash Twitter the company. They make fun of the company’s underperformance, especially in context to Facebook. Despite the growing power of Twitter’s network, user growth and usage exploding, there is an overwhelming amount of skepticism and pessimism about the company’s outlook. Twitter’s stock is barely higher than when it went public in 2013.

This is all about the change on the heels of the company finishing a complete rebuild of their ad technology platform, the potential of adding subscriptions and dramatically outperforming expectations. This could unleash one of the great Fear of Missing Out (FOMO) runs of 2020. Can the same investors who love the Twitter the service come to love Twitter the stock?

Twitter Has Many Paths to Monetization of its Network

In May, I wrote a report on Twitter that can be found here: Twitter is a Value Stock.

Here is a brief snippet:

Twitter is the most powerful news and curation tool in the world and is more valuable today to its users than ever before, but you wouldn’t know it by looking at its financials or its stock price. Twitter is nearly the same price as its IPO price seven years ago, despite increasing the value of its network exponentially. In the world of politics, journalism, finance, sports and technology, the value of Twitter’s network is unparalleled.

If this is true, why is the value of Twitter’s network not being reflected in the share price or financials? A historically distracted management, a disappointing advertising technology engine and a baffling strategy that ignores its “power users” has caused Twitter to dramatically under-monetize the value of its network.

However, now there are two new high-profile investors involved: Jesse Cohn from Elliott & Associates, an aggressive activist firm and Egon Durban from the stellar private equity firm Silver Lake. Both have recently joined the board and Twitter management will either have to start executing on its core advertising technology and implementing a new strategy around monetization or they will be replaced. Either way the stock should move dramatically higher.

The core Twitter network gets more valuable to its users every day and with change afoot, the stock should soon start reflecting that value.

Ad Tech Overhaul Now Complete

Two months later, and we now know that Twitter has completed an 18-month complete overhaul of their advertising technology. For more detail see here: Twitter Engineering on New Ad Tech Platform.

This is what Twitter engineering says:

After 10 years of iterative development, the system was too inefficient to further evolve with the organization. When it started, we were an extremely small team of engineers, serving a single type of ad format (Promoted Tweets), generating around $28M of revenue. Today, Twitter’s Revenue organization consists of 10X more engineers and ~$3B of revenue, supporting multiple ad formats - Brand, Video, Cards.

Low velocity for launching new products and tightly coupled cross team dependencies with high overhead costs added to the growing complexity of the organization. This demanded a fundamental change in order for us to scale any further.

For a company that has struggled to monetize its user base as effectively as Facebook, this is a big positive, claiming to have a much more scalable, powerful ad technology platform.

Subscriptions and Payments Are Coming

Two job postings were recently mistakenly listed with waaaaaaaayyy too much information about a new subscription offering. This made news and the company subsequently edited the job postings to be very generic and bland after this made headlines. And now it appears they are back up in their original form: Engineering Job Posting 1 and Engineering Job Posting 2.

In the postings, Twitter disclosed that they are “building a subscription platform,” the name of the project is called Gryphon, the engineering team building the service is located in four cities (Boston, London, SF, and NYC) and that they are working with a “payments team.”

In my report, I highlighted the big opportunity in subscriptions and what it could mean for Twitter:

One example is that there are “locked accounts” on Twitter, where for a variety of reasons, people do not want the broader public to follow their feed, only ones they invite and approve. In the finance world, there are stock picking and information feeds, where followers are encouraged to go off the site and pay and then they will get an invite to the locked feed. How in the world does this not happen inside Twitter’s ecosystem? Twitter is sitting on an incredible opportunity to promote a subscription model and encourage its users to do so, right within Twitter.

Beyond that, I would easily pay hundreds if not thousands of dollars a year for a Twitter Pro account, with extra features, connectivity and other tools, and I know a lot of people who would do the same thing.

Why can’t Bloomberg or the Wall Street Journal have a dedicated Twitter account for breaking news? With my Wall Street Journal subscription should be an option to receive a breaking news or special alert Twitter feed. I would imagine all of the news organizations could work with Twitter that could be a win-win for everyone involved.

If just 5% of its 166 million daily active users paid $10 a month (I would happily pay more) for a premium service, that would add $1 billion in revenue, and at 80% gross margins, cash flow would explode higher.

What is funny about this, is that after the release of my report in May, many on Twitter suggested the company would never launch a subscription product. I even ran a poll on Twitter in late May asking users if Twitter would launch a subscription service. 56% of respondents said no, they won’t. And this is from people that love and use the service!

Meanwhile Wall Street Analysts Could Not Be More Negative on Twitter

There are 8 buy recommendations on Twitter, 29 Hold recommendations and 4 Sell recommendations from Wall Street Analysts according to the Wall Street Journal (TWTR analyst ratings).

Compare that to Facebook, which has 36 Buy recommendations, 4 Holds and 7 Sells (FB Analyst ratings):

When the analyst and investment community’s opinions start to change, the stock could materially re-rate.

Summary

Investors are so used to bashing Twitter (especially, ironically, on Twitter), they aren’t paying attention to the improvements the company has made. And they may be missing out on the accelerated pace of innovation at Twitter. With so many analysts and investment professionals on Twitter, I believe no one will want to miss out on the rally when it gets going and everyone will want to be a part of it.

And as analysts and investors change their opinion, this could lead to one of the great FOMO rallies of the year.

P.S. Since my research report, another great analysis of Twitter came from Elliott Turner and that can be found here: Elliot Turner Analysis of Twitter.

Thank you to Cuyler and Alia on Value Investors Club for their work uncovering the job listings. Amazing work guys!