The Case against Twitter

Twitter announced earnings this past week and the stock quickly rallied 15% after the report. However, monthly user growth on the platform, which seemed to be the most important metric heading into earnings came up below expectations. It's a number that's been a concern for investors for months now. In the lead-up to the release, all the talk seemed to be on whether user growth would continue its slow down or Twitter would surprise analyst expectations. So why did the stock head up 15%? Well, EPS were double what analysts had expected, at 12 cents per share and revenue was higher than expected at $479 million. So Twitter proved that it will be able to monetize it's existing user base. In addition, the company announced a partnership with Google that will allow tweets to be searchable instantly from Google. The market seemed to be pleased with the revenue growth and EPS, ignoring the paltry user growth and the stock bounced. However, I'm here to argue that the market should be more concerned about user growth and less about monetization right now. It's user growth that will keep the company alive. In today's world of frantic, fast paced social media game, it's all about the new thing. Twitter may be losing that appeal. In comparison, Facebook has been very focused on increasing it's user base.

Facebook has focused on new users since inception, now able to boast over a billion active monthly users. Furthermore, the company owns Instagram, which has MORE active monthly users than Twitter. Mark Zuckerburg, unlike CEO of Twitter Dick Costolo, understands that it's all about user growth. Once you have users, you can begin to monetize the service. Facebook is well known, and has been growing strong recently. Take a look at the chart below to see the user growth comparison between Facebook and Twitter. That's not even including Instagram. The last chart is two years old, but the trend has stayed the same. Facebook showing a much better increase in the number of users as compared to Twitter. After you have a look at the charts, let's look at a few other services as well.

Over a billion users

Paltry User Growth

Comparing Facebook User Growth to that of Twitter.

Take Snapchat for instance. The WSJ claims the service has over 100 million monthly active users, and that was in August of 2014. That's only 1/3 of Twitter but it's most likely growing at a much faster rate. With features such as Snapchat story, snapcash, and the new discover feature, the company is hungrily looking to expand. Snapchat is churning out new features, twitter just can't seem to innovate new products fast enough to keep up in this age. Twitter is so slow to come out wiht new features that investors cheered when group direct messaging arrived and when "while you were away" started. Paltry in comparison. On snapchat, users send snaps (timed self destructing pictures) to each other and use story to share pictures from their day. Heading to the Knicks game? Make sure to put a picture on your story. Each users story deletes within 24 hours, creating a blank slate for the next day. Rinse and repeat. Users are hooked and have a reason to be on and uploading every hour of every day. Additionally, Snapchat has a new LIVE feature, that allow users who go to a certain event, say the Superbowl, to send snaps in and get put on the official Superbowl live feed. Every single user of snapchat has viewing access to the live feed of the Superbowl, where they can see other users snaps first hand. This has been a huge innovation and I believe is transforming the way young people get the news. For the Grammy's, you could watch celebrities own snapchats straight from the red carpet or back stage instead of going through an intermediary. It turns everyone into a reporter of some kind, giving a number of different perspectives from one event all into one place. This would never happen on an official news site like ESPN or CNN. Snapchat is here to stay and seems to be the most used app for kids around college age besides Instagram.

Take another new app, Yik-Yak. The anonymous posting app has largely taken the place of what young people would normally be tweeting. Instead of tweeting, a user can anonymously post to Yik-Yak where users can vote the post up or down. After a few hours, the post deletes. It's a continuous flow of posts, essentially tweets, all anonymous. For the young, I see more and more people moving to Yik-Yak for random thoughts and tid bits that would normally have been posted to twitter. This social media app may not be here to stay, but it shows how easily random "tweets" can be replaced. There is nothing keeping young people around, no novelty to tweeting over any other service.

It's going to take more than getting rid of "trolls" on the platform, as CEO Dick Costolo seems focused on, for Twitter to warrant the valuation the market currently gives it. What gives the company value, is growth, future growth. In order to grow, you need new users. The company can monetize existing users all it wants, this doesn't  give it to the valuation it currently has. Twitter is here to stay, but it's not here to explode. It's a useful service that allows people to get news and other pieces of information in an instant. That's all there is to it.