Blue bird takes flight

Through carving out engaged communities, Twitter has become more attractive to advertisers.

Jack Dorsey’s current appearance has raised a few eyebrows. Sporting a substantial beard and a hippie tie-dye shirt, his life has been as colourful as his fashion sense. Jack looks like a man working on a cannabis coffee recipe while studying photography and fine art.

The joke isn’t far off the truth. Jack wasn’t popular with venture capitalist investors in the early days of Twitter, with his unorthodox style leading to lower working hours and the pursuit of other interests such as yoga and fashion design.

The world is now far more accepting of balanced lifestyles and flexible working practices than it was in prior years. This is good news for creative people and great news for all of us because those are the people who build outlandish companies and change the world.

You may not agree with everything Jack does, but there’s no denying that he has had a lasting impact on the way people use online platforms. Many are not aware that Jack is the CEO of Twitter as well as Square, a giant in the US Fintech space.

Twitter has walked a difficult road. After going public in November 2013 at an IPO price of $26, the share price dropped as low as $14 in 2016. The company struggled to resonate with users at times, with unpopular character limits in prior years and controversial roles in various elections.

Jack’s own history with Twitter hasn’t been easy either. He founded Twitter in 2006 and was ousted from the position just two years later. After going off and building Square, he returned to Twitter in 2015.

It’s taken a long time to get to this point, but Twitter is finally starting to look less like Facebook’s poor relation and more like an attractive investment proposition. Twitter is up 32% year-to-date and Facebook is up 35%, having rallied off the back of Twitter’s earnings.

The market is pricing in the growth of social platforms and their ability to attract advertising spend. With Twitter reporting excellent revenue growth, the market ploughed into Facebook as well.

Although Facebook has been the far better choice for investors since IPO, wealth creation is a forward-looking game and the current trajectory of the companies is all that really matters.

Twitter’s blue bird has taken flight and the trajectory is exciting.

By focusing on niches and topics, Twitter has become the platform of choice for those interested in engagement on specific themes. For example, FinTwit is an exceptionally active community globally, with leading fund managers and investment students engaging on key topics and learning along the way.

Through carving out engaged communities, Twitter has become more attractive to advertisers. In the latest results, the company gives examples of Ford and McDonalds choosing Twitter for major activations for product launches.

The critical measure is cost per engagement (CPE), which is what advertisers are willing to pay Twitter in return for exposure. It works on an auction system, so the CPE reflects genuine demand from advertisers rather than Twitter setting prices. CPE increased 42% in the latest quarter vs the comparable period last year.

The jump in CPE and overall growth in advertising demand saw Twitter’s revenue grow by 74%. This took the company into a positive operating margin, although at only 3% margin there is still a long way to go before Twitter truly rewards investors.

Average monetizable daily active users (mDAU) reached 206 million. To help you benchmark this number, Facebook has around 1.9 billion DAUs. In fact, there are still fewer mDAUs at Twitter than there are paying subscribers at Netflix (209 million).

This growth certainly comes at a price. The company is still investing heavily in R&D and sales, with those expense lines up 39% and 46% respectively. Cost of revenue (which includes revenue-sharing arrangements, cloud expenses and other costs) was up 45%. General and administrative costs were much lower, however, thanks to a once-off in the base.

Total expenses were only up 20% but there’s a significant variable component in the core expense base which shouldn’t be ignored by investors.

Twitter’s strategic focus on creators and their audiences is clearly working. The market is paying up for this growth story, as the company is trading on a 14.5x revenue multiple. In comparison, Facebook is trading at 11.1x.

Those who are scared by enormous multiples should look away now. Snap Inc. (the company behind the teenage craze Snapchat) is trading on a revenue multiple of 36.9x after reporting record quarterly earnings.

By that standard, Twitter is practically a “value stock” among the social media platforms.

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