The Daily Dose: A Reluctant Twitter Bull

 | Feb 06, 2014 | 12:30 PM EST  | Comments
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Stock quotes in this article:

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Is valuation excessive on Twitter (TWTR)? Sure thing, if the market's volatile response to earnings after hours was an indication. 

Are monthly active users slowing (as pointed out in countless Twitter charts posted on Twitter) from the still-fresh blue-blooded IPO? You betcha. The stone cold truth, however, is that to the analyze Twitter and make buy and sell decisions on its stock, one has to morph into a new-school analyst. And yes, this is keeping in mind the emotional initial response to the earnings report.

Be the #TWTRCoolKid on the Street and mirror the real-time hipness of the social sharing platform. Why is this necessary? Twitter shares disconnected from fundamental realties on IPO day by rising 73%. The stock is up 140% since the IPO (as of the time of this writing after hours). And the company is taking questions from the Twitter universe for its earnings call by using special hashtags (for us nerds, it will be fun to see a Twitter earnings call trending worldwide), and investors have been OK with suspending analytical rituals to buy, buy, buy.

Here are three reasons I have become a reluctant, transformed, longer-term bull on the business of Twitter.

The Ruthless Battle for Eyeballs

The top 100 brands posted three times as many real-time messages on Twitter during the Super Bowl. Companies fully understand the value of the promoted Twitter tweet, and they will pay more to embed a quip or an interesting-looking picture that could go viral and land all sorts of national media attention. Brands are becoming hooked on Twitter, just like humans!

Also, brands are recognizing that controlling a discussion on Twitter could help their bottom lines, so they will seek to work closer with the company. Since these companies have huge annual advertising budgets, that equals more money for Twitter.

Tech Caffeine

When you observe new human behaviors being developed in the everyday environment because of Twitter, you may want to take notice of Twitter and the subsequent potential for its stock...

  • Vine videos with no ads are popping up, creating viral tweets. Twitter will soon put ads in videos.
  • Humans are becoming hooked on the instant gratification that Twitter offers, and it has taken a spot in our brains.
  • Humans are Tweeting friends who are sitting at the same dinner table.
  • TV shows that include live-streaming Twitter feeds only make people more obsessed with Twitter. People want to be seen and to tell all their friends they were seen. Advertisers love that and will pay more to be in front of their audiences in a new way.

Twitter Is the Future

  • One common comment on Twitter is that it's a beneficiary of smartphone growth. In 2013, worldwide smartphones hit 1 billion units, up 38.4% year over year. Twitter will increasingly benefit from declining smartphone prices globally. However, the focus on smartphones overlooks three new tech trends by which the company will attract eyeballs and more ad dollars (in other words, more revenue streams):
  • Smart cars: Twitter streams running on dashboard screens, with ads.
  • Wearables: Here come streaming timelines on an iWatch.
  • Touchscreen TVs: Tap a #hashtag embedded in commercials and immediately interact with followers and the brand. Advertisers will pay more for that interaction.

The Geeky Analyst Moment

So while it's cool to morph into a #TWTRCoolKid, it's OK, I suppose, to remember the classics of investing. Here are a few that pertain to Twitter:

  • Some rank-and-file execs could begin selling 9.9 million shares of Twitter on Feb. 15 to address income taxes. This would be 1% of the total shares outstanding. Execs, directors and large shareholders can't sell for 180 days after the IPO, or until May 6. That means that no selling pressure from the big guys is likely.
  • The average spent per Tweet is at $2.17 U.S., compared with $0.30 international. There's a big opportunity with the latter as Twitter mobilizes international sales teams.
  • 65% of the business comes from mobile ads, and Facebook (FB) just had a bang-up quarter from mobile. Twitter is teed up to have a strong number.

How to Know You Are Wrong on Twitter

This case will be wrong if new-user growth continues to slow, perhaps more sharply than in the just-released quarter. And if the stock price goes on a prolonged plunge between earnings reports, then clearly there is a rotation of people into Facebook. 

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