McDonald's Acquisition of Dynamic Yield - Software Continues to Eat the World

Last month, McDonald's made headlines by announcing it's largest acquisition in over 20 years, dishing out $300M for seven year old Dynamic Yield. A noteworthy move by the fast food giant that requires a second look:

Below listen to CEO Steve Easterbrook speak about the acquisition:

Items that stand out:
1. Mass personalization as opposed to mass generalization is the future of the service industry. No two menus will be the same, each customer will see entirely different ordering options much the same way two users see different Google search results now. This applies to all customer facing applications... on mobile, at a self order kiosk in a physical store, or on the drive thru.  

2. Software continues to eat the world. Algorithms replace repetitive human labor. What was once run entirely by labor intensive humans will not be digitized. The future looks something more like: Driver A's autonomous vehicle moves into McDonald’s drive through lane, a video monitor recognizes the car license plate or face of the driver. Software then quickly determines the personal preferences favor healthy options and there is only one occupant in the car. As the vehicle approaches the ordering screen, the menu will display salad options more prominently. 

3. Buzzword BINGO will never die. Listen to the video above to hit your letters... 'intelligent menu boards' / 'data mining' / 'digital platform' / 'personalized experience' /... even Amazon got a name check! 

Below is the original article written by Marc Andreessen in 2011:                                                       "Why Software is Eating the World"

Update: Federal Reserve Balance Sheet

During Fed Chair Jay Powell's testimony this week, it was made clear that the Fed Chair is looking to walk back comments made in December 2018 that the balance sheet reduction was on 'autopilot'. This comes just months after Powell first made the ‘autopilot’ statement and equities responded with a torrid sell off, falling close to 20% before ultimately bottoming on Christmas Eve. 

This turn around can lead investors to a couple of conclusions. First, the FED clearly takes into consideration ‘financial conditions’ or more likely, equity valuation / stability. The FED put, initially thought lost during chair Powell’s first few months, is alive and well. Second, the financial sector and the economy as a whole are less able to absorb a tightening of monetary policy than previously thought. 

Throughout 2018, there was substantial discussion that the FED balance sheet runoff was going smoothly, that the economy was humming along, with some commenting that the global economy was expierencing ‘synchronized global growth’. The below chart shows how far the FED has moved, after growing the balance sheet by over $3 Trillion, just ~$400B has rolled off. Relative to the increases, this was nothing and yet markets roiled up, volatility spiked, credit spreads were widening, and liquidity all of a sudden was being talked about as a risk. Economic growth may have even slowed as result, as businesses and consumers, concerned at the equity volatility, delayed spending / business investment in Q4. Now, the FED appears to have backed themselves into a corner on the balance sheet. The party’s back on, so let’s get up and keep dancing.

Amazon should purchase Ticketmaster or Live Nation

Amazon buying a ticketing service provider may seem odd at first glance. Yet, below I will explain why there are benefits to an acquisition of this kind. If Amazon were to purchase Ticketmaster (Parent company is Live Nation), it would be able to leverage the existing ticket distribution service to bring in more revenue and target more specific customer needs through the newly obtained customer data.

First, visitors to Ticketmaster and Live Nation sites will now redirect to Amazon.com/Ticketmaster or Amazon.com/Tickets. That way, additional traffic is directed towards the online marketplace. In 2015, Live Nation processed 530 million tickets, which is substantial traffic. Amazon.com is currently in the top 5 of sites visited in the USA. I am sure Jeff Bezos would like to see them as the #1 site. “The Everything Store” would gain an additional piece to that puzzle, a portal for live sporting events, concerts and more. Within the ticketing section, there will be links to merchandise for those same events. This leads to the next big benefit of the acquisition.

Customer Data. Amazon wants to know as much detail about its customers as possible. With the addition of a ticketing service, users will link their Amazon accounts to their ticket purchases. Amazon will now know what concerts, sporting events, or plays you like to attend. That information will enable Amazon to directly target products to individual customers based on music tastes, sporting tastes and so on. As time goes on, Amazon will understand who your favorite teams, what games you go to and when, and then be able to offer you deals on select merchandise heading into a football season, or into a game that they know you will be attending.

A scenario plays out where you log onto Amazon.com/tickets and purchase two tickets to the upcoming Knicks game. On the way to the cart, offers will pop for a Knicks hat, or a Carmelo Anthony jersey. Of course, free shipping is included with Prime. Certainly you are more likely to purchase that merchandise than someone that isn’t about to attend a game. This plays into Amazon’s strategy of being able to cater to customers on a personalized level. For the next two weeks leading into that game, Amazon can target specific products to you.

At a current market cap of $5.5 Billion, an acquisition of Live Nation will be a rounding error for Amazon. They could even purchase Ticketmaster from within Live Nation for less. This would be just another piece to the puzzle of becoming the “Everything Store” that Jeff Bezos has envisioned. Lastly, I haven’t mentioned the benefit of acquiring the ticketing business itself, a sector that has a long runway to grow considering the preference of live sporting/concert events that the younger generation has.

Pokemon GO: Potential Revenue for Nintendo

Nintendo shares are on fire after releasing the earth shattering, augmented reality "Pokemon GO" game this past week.

Thinking about this from a financial perspective, I will quickly summarize a potential revenue stream for Nintendo from the game.

Retailers and fast food chains can have Nintendo make their location an important stop where players can find rare items or Pokemon or whatever else is important to gather in the game. I'll save the specifics of what they need to have because I don't play the game myself, but I do understand there are certain locations that are important for players to visit. Stores can become that location and players would have to visit those stores to go further in the game. 

For example, this upcoming weekend, Wal-Mart may run a special that has their store give a higher chance of catching a rare Pokemon in the game. Nintendo charges Wal-Mart a fee for setting up a virtual Pokemon catching ground in their store for the weekend and Wal-Mart benefits by increasing foot traffic to the store and getting more potential customers inside the doors.

This could be any company, all over the world. It will be interesting to see how the augment gaming evolves over time. Yet, one thing is for sure, this will not be the last augmented reality game that takes the world by storm.

Alan Greenspan on Brexit

90 year old Former Fed Chairman Alan Greenspan speaking on the recent referendum in the United Kingdom. Greenspan believes Scotland will go for Independence next, and Northern Ireland is a maybe. Contagion is a key issue markets will be focusing on in the weeks ahead. Was Brexit a one off event, or part of a broader dissolution of the European Union?

Starbucks: Second Quarter Earnings after the Bell

Starbucks earnings are out after the bell today. I believe if earnings come in below expectations, this will be a great buying opportunity for long term investors. One concern for potential investors right now may be the high p/e multiple, currently around 37 times earnings.

However, long term, the strong growth from Starbucks will continue to impress. The company is pushing hard into China and Greater Asia with the market in China now the second largest for Starbucks, behind only the USA. CEO Howard Schultz has said the company plans to open 500 stores in China, every year for the next five years. Clearly, management is looking to take advantage of the growing incomes there. For those investors who may be doubting coffee culture in China or the rise of the consumer would be mistaken. This past March, when I was in China, every Starbucks I passed was jam packed. Now, before you dismiss an empirical observation, the numbers confirm what I saw, fourth quarter revenues in Asia doubled year over year for the company. Rising incomes in the region and the growing emergence of a middle class will only continue to drive top and bottom line growth for Starbucks.

With further expansion plans into South Africa and Italy, Starbucks growth is not tapped out and will continue for the company. This is without mentioning the loyalty program, increased mobile app usage, and the continued innovation in the stores with wireless charging and free wi-fi in stores. 

Starbucks is currently valued at $90 Billion and I wouldn't be surprised to see news headlines in the future highlighting how Starbucks has passed McDonalds (valued at $110 Billion) in terms of market cap. The arches are parting way for the green apron. 

Fitbit: The True Oppurtunity

On news that a Fitbit has helped save a man's life and with the stock being up over 10%... Today I want to talk about the true potential of Fitbit.

Right now, Fitbit is a fitness company. The company has a focus on helping people get in better shape. The social platform allows users to interact and compete against each other. However, the great opportunity for the company lies beyond fitness, it is in overall healthcare and corporate wellness programs. 

A Fitbit may help insurance companies save money. If people wearing Fitbit devices lead healthier lifestyles, insurers may pay out less in health care costs in the long run. Health insurers may begin subsidizing Fitbit devices to their customers. After all, just a few days ago it was reported that a Fitbit saved a man's life. The doctor was able to utilize data from the Fitbit to administer medical treatment properly.

I see three points of focus for Fitbit to transition further into being an overall healthcare company.

1. Greater analytics & appealing visual dashboard

2. Statistically proven health benefits of the device

3. Increasingly accurate sensors

Fitbit is doubling R&D spending for this year. CEO James Park has mentioned they view themselves as a "digital health and wellness company" and 2016 will be a year for increased
"software improvements, more algorithms, and coaching". This speaks beyond getting people up and running more, he is looking beyond the hardware and seeing what these devices can tell us. 

Analytics provided to healthcare insurers can help them understand how a Fitbit leads to a healthier lifestyle, what level of activity or heart rate can lower the chance of heart disease. Actionable insights from Fitbit will force the hand of insurance companies. It will become clear that they must find a way to get these devices into the hands of their customers. At that point, not only will sales from the physical devices soar but also Fitbit will begin to monetize additional aspects of the business. The data and analytics they provide can be monetized. 

Of course, for all of this to occur, the sensors on the devices must improve. It's a safe bet that Fitbit engineers are working hard to do just that. If you believe that this is a possibility, it may a worthwhile investment while the company is valued at just over $3 Billion. After all, the healthcare sector is a $1 Trillion plus business per year.

Fitbit & GoPro

Four quick reasons why Fitbit is NOT GoPro... so don't trade like it.

1. Executive Pay. The CEO and CFO of GoPro have sky high compensation packages. In fact, CEO Nick Woodman was the highest paid CEO in 2014. He even bought himself a fancy new yacht for about $40 million (Source). Compare that to CEO James Park of Fitbit who receives a modest $300,000 salary and has claimed that "Growing Fitbit is his life goal" (presumably sailing around on a $40 million yacht doesn't fit in with that goal). Some executives IPO their companies to cash out, while others look at the IPO as an opportunity to gain additional funding and grow the company further. The difference here is clear. The CEO of GoPro used the companies IPO to buy himself a yacht, while Fitbit's CEO is looking to make strategic acquisitions to grow the company.

CEO of GoPro was making $10 million more than Larry Ellison of Oracle. Executive pay is barely behind that of Satya Nadella, CEO of Microsoft, a company with a market cap 400 times that of GoPro. 

2. New Product Launches. GoPro has not come out with a significant new product since the Hero 4 series launch in 2014. Fitbit has announced a watch (the Blaze) and a new revamp of one tracker line (the Alta) for March launch. Continuous new product initiatives will help Fitbit maintain it's market share lead in wearables. On the other hand, GoPro has been caught by competitors, and it seems only marketing is keeping them ahead of the competition in the short term. 

3. Data/Software & Social. Fitbit is focusing on becoming a health company. The data they collect from users will be used to increase the health of those same users. Data is king in todays world, and CEO James Park has said that 2/3 of R&D is spent on software. That's a great sign and proves Fitbit understands that the company's true value is beyond just the hardware. True value comes from what they can tell users and how an analysis of the health data will lead to healthier lives of its customers. Fitbit's $50 per year premier membership for additional user data insights is a good step in that direction. This differs drastically from GoPro which offers little value beyond the camera hardware. The video editing software that GoPro provides has little intrinsic value to consumers who have many options in the space. Software and social aspects are an important way to rope consumers into a growing ecosystem, something Fitbit is clearly focusing on. Due to network effects, the more people that purchase a Fitbit, the more valuable it becomes for others to get one  as well. 

4. Financial Strength. Fitbit has been a profitable company for some time now and has near 0 debt on the balance sheet. Conversely, GoPro turned a loss in it's latest quarter, a holiday quarter nonetheless. Not many new tech IPOs are able to turn a profit so early, Fitbit has been an exception and looks to be in good shape on the financial front.

Ultimately, fears of Fitbit facing a similar demise to GoPro are overblown. Do not be surprised to see a decoupling of the stock price correlation. Fitbit's future is much brighter than GoPros and the market is sure to figure that out in time.

Fitbit Blaze & the Need for Speed

Fitbit recently announced it's newest product line, a smartwatch deemed the 'Blaze'. Similar to the Apple Watch in looks, the Blaze touts 5 days of battery life and a strict focus on fitness features. CEO James Park talked up the "style" of the watch and wants Blaze owners to have a simplified user experience. Not only does it look like an Apple Watch, the CEO is starting to sound like an Apple executive.  Investors were left unimpressed with the product and the words, the stock has shed over 30% since the announcement.

                   The Apple Watch                                 vs.                                   The Fitbit Blaze

According to investors, the two years of resources Fitbit spent developing the Blaze may have been better used elsewhere. Though consumers seem to have a different opinion than investors. The watch went on to win multiple awards at the CES show it was unveiled at. Now valued at 30 times earnings, investors are expecting bigger and better than just the Blaze. I believe current worries about Fitbits future lie not with the Blaze, but with two other things.

Before going into what needs to be improved. I need to clarify that I am bullish on the Fitbit's future and the future of wearables in general. Here is what I think Fitbit does have going well for it right now.... 

1. The brand name and beneficial network effects of controlling 85% market share.
2. Increasing use of Fitbit in corporate wellness programs
3. The social appeal (Challenges, Forums)
4.. Potential monetization of user health data analysis... the $50 per year Fitness Premium is moving in this direction.
5. Growth of overall wearable markets (The pie continues to grow)


Now, there are plenty of quick software improvements that will make existing customers more involved. Here are the two improvement areas that Fitbit investors should be more concerned and excited about...

1. The slow pace of software enhancements
2. The lack of lineup refresh. 

CEO James Park has touted that Fitbit has never had a bad quarter, indeed the 8 year old company has consistently turned a profit and has little to no debt. That cannot be said for plenty of other companies that had IPOs in 2015. And it is a great foundation for the company to build on, but moving forward the company needs to move faster, and the insistent on maintaining profitability in the short term may be holding the company back and allowing competitors to catch up. Apple, Under Armour, Microsoft and others that have expanded into the wearables market all have deeper pockets. Growth is key to maintaining the edge for Fitbit. Fitness trackers are not a fad, people do truly love quantifying their workouts. As the current leader in market share, Fitbit needs to continue improving and continue innovating or else others will quickly catch up.

Software should be a #1 priority for Fitbit. The company does have a forum entirely dedicated to new software Feature Requests. Browsing through the posts, you can quickly spot posts by customers who love their Fitbit, but want it to be able to tell them even more. Some requests are listed below.


- Additional challenges beyond steps and daily challenges. Something like adding in a 1 hour workout challenge, or a monthly calorie challenge etc...

- Better sleep analysis, possibly combining sleep with heart rate analysis to gain additional understanding of our sleep patterns. A better user interface.

- Adding exercises like push-ups/situps and cycling
- Idle Alert to buzz you when you've been inactive for a certain period (post has been up since 2013)
- Alarms that can wake you up naturally based on your sleep pattern (post has been up since 2013)

Even very a simple addition like adding new clock faces have been left untouched. What are software engineers doing at the company?

Additionally, I think Fitbit should be investigating the potential for bands that can track heart rate or blood pressure. The heart rate monitor is not as accurate as it needs to be, as recent class action lawsuits show. Bands with sensors would help incorporate even greater levels of accuracy.

There are plenty of ways for Fitbit to keep moving forward. An emphasis on software and an entire lineup refresh with better sensors is monumentally important. The current challenge feature, the ability to add friends and communicate about your workouts throughout the day is a major differentiator from other fitness trackers. Investing in hardware is important, but the ecosystem of Fitbit needs to be greatly expanded and utilized much more effectively to fend off competition. A moat needs to be built to keep users from jumping ship so easily if cheaper competitors exist.

Ultimately, I think Fitbit is a buy at it's current level of $17-$18. They clearly had a great holiday season, backed up by being the #1 downloaded App on the Apple App Store over Christmas. The company is off to a fast start, but now it needs to put it all together.

Twitter Q2 Earnings: Users Growth Officially Over at Twitter

Even the executives at Twitter have finally acknowledged the companies' biggest issue: a lack of user growth. On the earnings call yesterday, Interim CEO Jack Dorsey spoke about how the current user growth numbers are unacceptable, while CFO Anthony Noto claimed any new increase in users would take "a considerable time". Clearly not something investors wanted to hear, the stock, which was up over 6% after hours, plummeted 12%, opening today around $32 a share. The only positive was a beat on revenue and EPS, though the company still has yet to turn a profit. As the executives seem to be taking a "long road" and focusing on monetization now and growth later, the company could be in some serious trouble. The focus for social media companies in particular, where being cool and hip is highly important, is to get as many users to join as quickly as possible and worry about monetizing their user base down the road. (I've been writing about the issue of user growth since February: Link Here). In my view, this was another terrible quarter for Twitter, a growth company shouldn't care about increasing revenue so soon, the focus should be on user growth, a number that has been slowing for months now. Finally, the executives mentioned the problem, but not in the right way. The rudderless ship looks sure to continue to drift. Below, we look further at the user growth problem.

Monthly Users were up 15% year over year, due to an increase in SMS based users.

User Growth Up? Not so fast.
The small increase that Twitter saw in user growth came from SMS users. So what exactly is an SMS User? Essentially, these are people who sign up for specific text message alerts of tweets they deem important. So a baseball fan may want a text when Derek Jeter tweets his return to the Yankees. These users DO NOT need a Twitter account to sign up for this service. SMS users do not even have to open the Twitter app to access these tweets, they will only receive it as a text. Twitter is happy to let these users fall to the wayside, why open the app at all? In the meantime, Snapchat/Facebook/Instagram and others will continue to build up real time news stories INSIDE their apps. Alternatives to what twitter does will grow everyday. Almost every other week Snapchat launches small tweaks to it's app, Twitter hasn't had any major product innovations at all. Twitter might also have to start worrying about a drop in the value of its network, as more people leave the service for other competitors, the less valuable it becomes for those left to have a twitter account. This is because people will find less of their social network, whether friends or professional, using the app, thus Twitter loses more of it's drive for users to continue using the app. This can snowball rather quickly, especially if users have alternatives and are flooding to another service (such as Snapchat or Instagram). For anyone who downplays the significance of this, think back to how quickly Blackberry fell from grace. At the end of the day, excluding these pretend SMS users, Twitter had no user growth. No one is joining the service anymore, because, why should they? 

More Executives Leaving
Not to mention, two executives are leaving the company, continuing the fast swinging door that has become the norm at Twitter. The head of GROWTH at Twitter announced he will be moving on to better things at YouTube (owned by Google). Additionally, a product director is also be jumping ship, heading over to Dropbox. Twitter has yet to find steady leadership, a troubling note. Looking around at other success stories, there is almost always a strong leader with a clear vision of the company. Tesla and Elon Musk, Apple and Steve Jobs, Microsoft and Bill Gates, Virgin and Richard Branson, Facebook and Mark Zuckerberg, . These names become synonymous with the company, Twitter lacks this vision and leadership, another troubling sign.

Apple Earnings: Investors sell on earnings beat

Apple is opening today down 6.5% at around $123, lower then yesterday's $130 pre-earnings close. Hearing this, one might think earnings were disappointing, yet the opposite was true. Revenue and earnings were higher than expected (Q3 earnings per share estimate was $1.81, Apple reported $1.85 , revenue estimate was $49.43 Billion and Apple reported $49.6 Billion) These were high expectations to begin with, with many analysts ratcheting up estimates in the lead up given Apple's record with earnings beats, and Apple still beat. This steep drop in stock value seems to be investors disappointed that Apple didn't beat by much more, which doesn't appear to be very rational. I will go over each product category and why I think that Apple is poised for more growth and is a buy after this current sell-off.

Iphone
Everyone was focusing in on this product, would sales slow down from it's incredible speed. Apple sold almost 50 million Iphones in the quarter, with sales jumping by 35% year over year. This at a time when when many people might be holding off to buy the newer Iphone 7, which will be announced in September. Where is the problem? Numbers on the Iphone continue to impress, growth in China continues to impress, users continue to upgrade to the newer model, and Tim Cook claims this quarter had the most people switching from Android to Iphone ever. Consumers have chosen the Iphone as the prized mobile phone.

Apple Watch                          

Getty Images

This is one area where many investors are getting anxious for immediate results. Apple has yet to release sales data for the watch, though Tim Cook said that sales have "beat internal estimates". That sounds good to me, and before launch most investors were saying the watch had zero impact on the bottom line anyway. Now everyone is worried that the watch is not taking off. This is a product line that won't explode like the Iphone, it's an entirely new category with an entirely different objective. Though Tim Cook said sales of the watch were higher in June than in the previous two months, so the watch could already be gathering speed. Wearable technology will grow, albeit steadily. The apple watch will benefit from that growth, and at an average price of $600 per watch, this product line will have a sizable revenue in the future. Investors seem to be short sighted on this, wanting big gains now. Maybe people are spoiled from the massive success of the Iphone. Time will tell.

Mac Sales
Sales of the laptop grew by more than 9%, at a time when PC sales are falling around the world. Investors seem not to care about this, but this development shows that people are investing in the ecosystem. A phone, computer, watch, TV, all will go together. The cost of switching one or the other goes up the more Apple products you have. With Tim Cook speaking about android users switching to Iphone, it becomes a matter of time before they also ditch a windows computer for a Macbook.

Ipad Sales
Sales slumped here again. To me, this is a niche product, it's a convenience, especially with phone screen size increasing. If someone is invested in the ecosystem, they might purchase this for their daily commute or for work. Households may purchase an Ipad for their children, however Apple continues to push for businesses to adapt Ipads. This might continue, with some cash registers switching over to Ipad use. However, I don't see this category blowing out expectations anytime soon. That's just fine with me, with yearly improvements, the Ipad isn't going away, it just isn't going to grow like the Iphone.

Apple Pay
Barely even mentioned, Apple Pay has just launched in the UK. Another new innovation that more and more people will continue to adapt around the world. The ecosystem for Apple is growing, and the watch will make Apple Pay even more viable, allowing users to purchase items by just holding out their arm. It's just another reason to own the watch or Iphone. Small innovation can go a long way.

China
Investors also seem worried about growth in China given the recent stock market collapse there. Yet overall sales more than doubled in the region, and Tim Cook continued to be optimistic about further increases in sales, as the company plans to open more stores there. As the WSJ pointed out Iphone sales in greater China rose 87%. That hardly appears to be a slowdown. No one seems to speak about the network affect as well, as more people in China purchase an Iphone, it becomes more valuable and more wanted due to network effects.

Conclusion
Apple continues to print money from it's ecosystem, especially the Iphone. With over $200 Billion in cash, a stellar product line with continued innovations, the company is positioned well for future growth. Not to mention the stock is trading at a discount relative to the rest of the market with a P/E around 15. I recommend AAPL as a buy here, I see no major slowdowns in Iphone sales which worries many others. The watch will continue to catch on, along with improvements in the Apple TV and possibly even an Apple car ecosystem down the road, this company will continue it's dominant growth in the tech industry. Buy low, sell high. Now is the chance to get it low.

Twitter CEO Flys Off

The time has come. Twitter CEO Dick Costolo has officially announced he will step down. After the announcement, the stock price quickly rallied almost 7%, before finally settling up close to 4%. The euphoria was short lived however, as the stock price is down 3% since the announcement. Investors have been questioning Costolo's leadership at the helm for a few months. Back in April I wrote about Twitter's complete lack of product improvements and pointing fingers at the CEO, I said it might be time Costolo departed the company. Though he will stay on as a board member, this has happened. Investors now are becoming worried this may lead to the company being a "rudderless ship" so to speak. Although many are happy Costolo is gone, the question seems to be "Why now?" Costolo could have remained on board until a replacement was found. Now the race is on to find the next CEO before investor sentiment turns even more sour. It seemed investors all over are not content with the way Twitter was developing even before this announcement, with the likes of large investor and former Google employee Chris Sacca writing a long blog post about changes the company should make.

Costolo making a Presentation.

 Sacca is still a long term believer in the company, whereas I myself and having some doubts. The biggest issue right now seems to be the direction of the company itself. When Mark Zuckerberg was supposedly quoted as saying "They drove a clown car that fell into a gold mine" he may not be far off. Twitter is the place to go for breaking news. TV shows and live sporting events will broadcast hashtags on screen for the audience to tweet about, and news anchors and sports casters display their twitter username on screen to gain followers. It has a massive presence for the now, and yet user growth and revenue has not grown even close to what Facebook was able to achieve. It's time to change that, and I'll be curious to see who replaces Costolo and how they will define what Twitter will be in the future. A new vision and new product improvements must come quickly, or Twitter runs a risk of falling to the wayside.

Vindication: Twitter Earnings Disapoint

Quick preface video before diving in.

In February I wrote here saying Twitter was overvalued as important metrics such user growth were quite lackluster. While writing that article, the stock was rallying and hit a cool $48 per share, rising even further, breaking past $50-$51 before finally plummeting following yesterday's earnings release. Today, the stock is down another 9%, hovering around $38.50.

During the previous earnings reports, user growth was the disappointing aspect, but at least the revenue growth and earnings were solid. Financials were better, growth was not. This time around, Twitter disappointed on all fronts, even missing it's own revenue estimates. There are lots of points to touch on, but I just want to focus on the new product developments from twitter. In my opinion, Facebook, Instagram, Yik Yak, and Snapchat are leaving Twitter in the dust when it comes to new features. The results show in the user growth. These companies blow Twitter out of the water in terms of daily users. There is no way that people are going to join Twitter in the same way that Facebook or Instagram were able to attract users. If you are not at the forefront of new technology, you can easily fall to the wayside like Blackberry or MySpace, and this is especially true in the realm of social media.

Last post I spoke about the lack of new product releases on the platform. Well, since that time Twitter has actually gone IN REVERSE. Instead of adding new features, Twitter has gotten rid of some aspects of that app. For instance, the activity feed that showed you what people you follow were doing on twitter. On this section, you were able to look what tweets people were favoriting and who they had recently followed. That's gone. Instead, they combined all aspects of the app into just the homepage of tweets and a search feature, which shows what is trending on twitter. That's it. In fact, the biggest innovation seems to be the "while you were away" feature, which shows tweets that you may have missed since you last logged in. Meaning, if I haven't been on twitter in 24 hours, it will show me tweets that were happening 18-24 hours ago, in a "while you were away" section. This is a worthless feature. Twitter is all about the PRESENT and BREAKING NEWS. I don't log onto twitter to see what someone tweeted in the past. I check my feed when there the World Cup is on, or the NBA Finals is ongoing, when there is unrest in Baltimore and I can get a live feed on the situation, when there is an economic summit and so on. The entire premise of that feature is flawed. Twitter is a news site. It's not about individuals or people, it is entirely premised on events. In that sense, it is not a typical social media site, where the focus is on each person and that person's long term profile. Twitter is short term oriented. I'm not sure where the company goes from here, but I don't believe it's moving in the right direction at the moment.

It might be time Dick Costolo found the exit. Until there are significant product improvements, the long term prospects of the company don't appear to be as positive as the current valuation suggests.

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.