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Twitter Team Business Essay
- 1. NYSE: TWTR Sector: Technology Industry:Internet Media Current Price (as of 12/05/14): $38.49 Recommendation: BUY INTRODUCTION In evaluating Twitter we came to the conclusion that their model of value creation is sustainable for two specific reasons. The first is the consistent increase in the amount of Monthly Average Users (MAUs). Since Twitter’s inception they have had constant growth in terms of MAUs and, as we will explain in the report, users contribute to the network effects that create value for Twitter. The second reason is the increase in future ad spending that will occur in the next five years, with some analysts forecasting this spending doubles to $214 billion by 2018. Twitter generates the majority of their revenue through money spent on advertising. The final reason was the acquisitions that Twitter has made. We believe that Twitter’s revenues will continue to grow as the company continues to be innovative in their approach to the market. BUSINESS DESCRIPTION Thomas Benson Twitter, Inc. is an internet media service and a global social networking platform. Using the Bloomberg function DES, we were able to find Twitter provides a compelling and efficient way for people to stay informed about their interests and stay involved with what is going on in their world right now. The company offers users the ability to follow other users’ activity, read and post tweets. Tweets are limited to 140 characters, but can include photos, videos and other types of media. Twitter operates at a global scale, and has over 240 million monthly active users (MAU’s). On average, users generate over 500 million tweets per day. Twitter’s user base includes multiple influential personalities, such as world leaders, government officials, celebrities, athletes, journalists, sports teams, media outlets, and brands. The company offers a Twitter app for iOS, Android, and Windows mobile operating systems, giving users the ability to tweet on the go. Twitter’s mobile products are critical to the business. In the three months ended December 31, 2013 76% of Twitters MAU’s accessed Twitter from a mobile device, and 75% of Twitter’s advertising revenue was generated from mobile devices. Twitter generates its advertising revenue primarily from the sale of its three Promoted Products: Promoted Tweets, Promoted Accounts and Promoted Trends. Using the GP Bloomberg function, we can analyze Twitter’s price history. As of October 20, 2014, Twitter is trading around $50.64. This figure is below Twitter’s 52 week high of $73.31 on December 26th , 2013 and is above Twitter’s 52 week low of $26.00 on November 6th 2013. Twitter operates out of San Francisco, California. Twitter completed their IPO in November 2013 and its common stock is listed on the NYSE under the ticker symbol “TWTR”. -TB SECTOR & INDUSTRY OVERVIEW Thomas Benson With personal computers on the decline, the technology sector is filled with aging companies failing to innovate and adapt to the new marketplace. However, within this massive sector, there is an industry that is thriving, and it’s just getting started. That industry is the Internet Media industry, and it’s composed of new technology companies that are constantly using mobile devices and social media to innovate and stay relevant; companies like Twitter. These new tech stars that are using social and mobile application are the future of the Technology sector. Using the BIP Bloomberg function, Twitter’s main competitors in the Internet Media industry are Facebook Inc., Pandora Media Inc., AOL Inc., IAC/InterActiveCorp, LinkedIn Corp, Google Inc., Yahoo! Inc., and Yelp Inc. Twitter has a market cap of $30.72 billion, which is above the industry average of $283.20 million, but below the $200.07 billion market cap of their main competitor, Facebook Inc. Looking at Twitter’s competitors from a pure social media platform standpoint, Twitter is currently second in social network logins, behind Facebook. (See chart below)
- 2. The Internet Mediaindustry continues to grow at a significant rate. Global internet advertisement spending, global mobile advertisement spending and global online video advertisement spending are all increasing at steady rates. This is a good sign for the future of Twitter and the future of the Internet Media industry as a whole. Citing Bank of America Merrill Lynch’s September 2014 Internet industry overview report, the number of mobile users is up 39% year over year and the amount of time spent on mobile devices is up 52% year over year. This is good news for Twitter as a majority of their revenue is generated from mobile devices. Also, with smartphone users expected to reach 6 billion users by 2020, Twitter’s total addressable market (TAM) will continue to increase as well. This gives Twitter the ability to stay competitive and sustain long-term growth. -TB MARKET SEGMENTS Thomas Benson Twitter’s top line growth is most substantially influenced by its ability to generate third party advertising revenue. Twitter generated 85% and 89% of its total revenue from advertising revenue in the fiscal year ended December 31, 2012 and the fiscal year ended December 31, 2013, respectively. Twitter tells us to value their company by the aforementioned advertising growth, as well as their ability to grow their user base; which is primarily measured in the amount of MAUs. Twitter’s Promoted Products give advertisers the ability to promote their brands, products, and services by increasing the visibility and reach to the consumer. These products are the primary driver for twitter’s revenue. Promoted Tweets appear within a user’s timeline just like an ordinary tweet. Using Twitters knowledge of each individual user’s preferences, combined with a unique algorithm, Promoted Tweets are only displayed on the timelines of the relevant users whose preferences match that of the advertisement. For example, if a user follows a lot of sports teams, they might see a Promoted Tweet in their timeline from Coca-Cola that is themed around The Super Bowl. The second Promoted Product is called Promoted Accounts. These operate in the same style as Promoted Tweets, only appearing on the users’ timelines who are relevant to the advertisement. Promoted Accounts give the advertisers a way to grow their companies’ followers, therefore increasing their community of users who are interested in their business, products or services. The final segment of Twitter’s Promoted Products is Promoted Trends. Twitter features trending topics each day that are relevant to a particular country or topics that are relevant on a global scale. When a user clicks on a trend, they are shown search results for that trend and a Promoted Tweet from the advertiser. Twitter allows for one promoted trend per day, per geography to be featured in their trends. -TB DOMESTIC INDUSTRY EXPERT: MATT BISHOP Thomas Benson The high growth rate of the Internet Media industry correlates precisely with the positive views of the industry provided by our domestic expert, Matt Bishop. Mr. Bishop lectured about the future of the Digital Communications industry and gave his personal insight and what he believes the future of the industry entails. Using Mr. Bishop’s example, the media traditionally operates using parasocial relationships. This means that the millions of viewers feel like they may know the media celebrities on a personal level, but on the other hand the celebrities do not know anything about the viewers. He suggests that “New Media” platforms, such as Twitter, provide a new level of intimacy and connection between the fans and the celebrities, something that fans have craved forever. Mr. Bishop states how people want information to be available right away. Twitter’s unique platform gives users up-to-the-second updates of what is going on in the world. Before New Media and the internet, the public would have to wait for the evening or morning paper to get updates on breaking news. Now, newspaper companies like The Wall St. Journal and The New Facebook 42% Twitter, 27% Tumblr, 12% LinkedIn, 10% Instagram 9% Facebook Twitter Tumblr LinkedIn Instagram
- 3. York Times, whohave 5.1 million and 13.6 million Twitter followers respectively. Twitter gives these companies the ability to update their followers with breaking news throughout the day. Innovative platforms such as Twitter, give companies, journalists and influential personalities a new media avenue to provide their viewers the live breaking news they so greatly desire. Twitter’s constant innovation gives them high multi-year growth potential. -TB MACRO ANALYSIS Thomas Benson Building a worldwide view of the macro perspective of Twitter and the Internet Media industry is essential in projecting Twitter’s revenue growth rates; rates that will ultimately make Twitter’s stock go higher. Both cyclical and secular trends will impact Twitter’s success. From a cyclical viewpoint, they need worldwide economic growth to help them “beat the numbers”. More in depth, Twitter needs to increase their exposure to to emerging markets so they can grow their user base as more countries adapt to this new technology. Another cyclical issue may be if the world economy slows, advertisers will advertise less. On the other hand, Twitter has secular trends in their favor. One of those trends is the improved speed and overall improvement of the equipment in the telecommunications industry. The rapid adaptation of mobile devices around the world helps keep them competitive and gives them long- term growth potential. In discussing our bullish opinion for Twitter’s revenue growth, we wanted make sure we had a good understanding of a top-down macro view on Twitter and its industry. We wanted to make a point of using this data because businesses don’t occur in a vacuum; and what’s going on outside of our country will have major implications on long- term revenue growth ability. Further on in our report, we will go into detail about the statistics the students from RMIT, which is located in Australia, provided us and how they have helped us come to our revenue growth figure. -TB VALUE CREATION Ryan Grogan In researching Twitter we found it tough to find concrete pricing information on the products the company offered. Twitter does not provide specific pricing information for their products as they are mostly pay for performance products. We found Twitter’s most recent 10K filing within Bloomberg's CF function. Their 10K stated that Twitter’s platform partners and advertisers are what help create value for users. Within their 10K Twitter has said that their revenue does not come directly from users or platform partners, but rather from “network effects where more activity on Twitter results in creation and distribution of more content, which attracts more users, platform partners, and advertisers, resulting in a virtuous cycle of value creation”. In the last six months, Twitter has had a 374% increase in the number of ad engagements, which has increase the demand for advertising on Twitter. Twitter measures user engagement through timeline views. Twitter has seen a 15% global increase in timeline views in the last six months. Twitter uses timeline views as a component in measuring their ability to monetize their platforms. Advertising revenue per timeline view is the advertising revenue for every 1,000 timeline views. As of June 30, 2014 Twitter saw a 100% increase in advertising revenue per timeline view to $1.60. We believe Twitter’ current value creation strategy is sustainable given the facts that their user rates and revenues have increased every year and look to continue this upward progression into the future. -RG TWITTER’S STRENGHTS Ryan Grogan Twitter has a number of different strengths which have allowed it to blossom into the company it is today. The speed of information flow over Twitter is faster than almost any other media. The tweets that people send out go viral immediately and reach people all around the world. Twitter also gives you the advantage of hearing it straight from the horse’s mouth as celebrities, corporations, artists, etc. have their own Twitter accounts which they, for the most part, post on themselves. Twitter can also be used as a research tool for companies as you can do a twitter search to see what people are saying about your brand/company as well as your competitors. Companies can also engage their customers more directly than advertising on more traditional media outlets. -RG
- 4. TWITTER’S WEAKNESSES Ryan Grogan Twitter’smain weakness is it limits the person sending out the Tweet to just 140 characters. This can pose a challenge to the person sending out the message. Research has also shown that there is a unequal Tweet distribution, as 90% of Tweets come from just 10% of users. Content lifespan has also popped up as a threat to Twitter. We found that the average Tweet lasted only about an hour, causing the user to either re-Tweet or risk the Tweet becoming irrelevant. A final crucial weakness of Twitter is the users themselves. People often don’t think before they Tweet, which has promoted many people to use the saying, “Think before you hit send”. -RG PRODUCTS & PRICING Ryan Grogan According to Bloomberg’s FA function, Twitter generated revenues of $664.9 million in 2013, a 109% increase from 2012. Twitter currently has a market cap of $30.72 billion and expects revenues to grow to $979.11 million in 2014. Twitter does all this with just two main sources for revenue: advertising and licensing data to third parties. Twitter’s three main products, Promoted Tweets, Promoted Trends, and Promoted Accounts, produce the majority of Twitter’s revenues and are all varying forms of advertising. Promoted Tweets and Promoted Accounts are interesting tools because customers only pay Twitter when someone either engages the Promoted Tweet or follows a Promoted Account. Promoted Trends have a fixed fee-per- day basis. In researching these products we could not find price elasticity because Twitter does not reveal specific prices it charges for each product. Twitter faces a large number of substitute products, but there are only vague similarities in these products. -RG COMPANY COMPETITION Ryan Grogan As found in Bloomberg’s SPLC function, Twitter only has four suppliers all of which only add up to about 0.5% of revenue growth. This means Twitter’s suppliers hold little to no bargaining power over the company. Customers of Twitter have no stronghold over the company either as there are 123 total customers, with the Disney contributing the largest part of revenue at just 1.24%. As specified in Bloomberg’s SPLC function, out of 27 competitors 17 of these companies are growing. These 17 companies can be seen as substitutes for Twitter’s products. But, Twitter’s competition is split into two segments: user competition and advertising competition. Twitter is currently competing with Facebook, LinkedIn, Google, and Yahoo! for user growth. As reported in their annual 10K reports, Twitter saw a 30% increase in MAUs from 2012 to 2013 (184.9 million users to 240.9 million users). But, in reviewing the RMIT students’ data I realized that this still dwindles in comparison to Facebook’s 1.3 billion MAUs. Twitter expects their growth in MAUs to continue, but will face stiff competition. Currently, Facebook has a $200.07 billion market cap with $10.01 billion in revenues, Google has a $353.27 billion market cap with $67.19 billion in revenues, and LinkedIn has a market cap of $24.39 billion with revenues of $1.85 billion. Twitter’s main competitors in user growth, with the exception of LinkedIn, have a significant leg up in terms of market cap and revenue streams. Although this will impair Twitter’s ability to continue its user growth, it does not spell the end for Twitter. –RG ADVERTISING COMPETITION Ryan Grogan The other side of Twitter’s competition is segmented into advertising. There are a multitude of factors that affect a company’s ability to compete within this segment. The size and composition of 151 167 185 204 218 232 241 256 271 0 50 100 150 200 250 300 Quarterlyaverageinmillions Monthly Active Users: Worldwide
- 5. over the userbase, ad targeting capabilities, marketing/selling efforts, return advertisers receive, and reputation of the brand all affect whether a company’s advertising will be effective. Twitter is beginning to gain ground in this segment of competition. As stated in Bloomberg’s BIP function, digital ads may reach a third of all global advertising spending. Furthermore, experts expect this spending on digital ads to double by 2018 to $214 billion. This is great sign for Twitter, as their percentage of overall net digital ad revenue has increased each year as a company (0.26% in 2012, 0.50% in 2013, and 0.79% in 2014). Based on Twitter’s current trend we project their overall percentage of the net digital advertising revenue to reach 1.7% by 2018. -RG TWITTER’S OPPORTUNITIES Peter Steinmann Twitter has many opportunities in which they can increase their net worth and reputation. Twitters opportunities they have been presented with are, the untapped users in other countries, an increase in technology use in the United States, the increase in digital ad spending, and the increase in popularity of twitter. All of these opportunities will increase twitter’s overall net worth. Another opportunity Twitter has been presented with is the ability to now include a “buy now” button in tweets which will increase sales for other companies as well as increase the attractiveness of advertising with Twitter over other platforms. – PS TWITTER’S THREATS Peter Steinmann Like all companies Twitter is always faced with threats that will affect their company in some way. Twitter has many different kinds of threats that can affect their company. Some threats that they have are threat of substitute service, threat of new entry, the threat of big name users using substitute service, the inability to show customers the value of the company, and the inability to keep the product up to date including new upgrades to keep consumers interested. The biggest threat the company faces is the threat of alternative products. Also, another threat which has become a popular threat to a lot of companies is the threat of privacy with user’s information. There have been many breaches in companies information servers like Target, Snapchat, and Home Depot. The last threat I will talk about is a very major threat towards twitter due to the fact they rely heavily on their reputation. The threat is damage to Twitter’s reputation. Twitter addresses some of these threats in their 10K report. -PS THREAT OF NEW ENTRY Peter Steinmann Twitter is one of the most widely used social media sites around. People use it all around the world. So when companies see a company do so well with an idea they immediately think of spin offs and similar ideas. This creates a threat of new entry for Twitter and their sub-companies like vine and #music. Vine was very popular in 2013 and is still a popular social media application. Vine is a video creating social media device that would be on a loop for 6.5 seconds. Vine has helped many people become “social media famous” such as Marcus Johns, his brother Cody Johns, and Lauren Geraldo. All very young and each can make $2,000 with just a click of the “revine” button on a sponsored vine. So, when people become famous off of using a platform, it makes more and more people use it. When more people use it, spinoffs are formed. The threats of new entry for Vine that have currently happened are Instagram (owned by Facebook), who have added a record button to their already very famous photo-sharing social media platform. There have been many other companies who have tried to replicate vine but none of them have been successful. Twitter as a whole has very little threats of new entry. They have purchased new office buildings and have increased been increasing in number of new members therefore this are all common signs that twitter has control of their market. According to Financial Times Twitter has the most loyal social media Customers than any other platform which is why they are ahead. Also according to the Merrill Lynch Article “September Mobile Minutes”, they have estimated that in the year 2028 there will close to 800 Million twitter Users. Using Bloomberg’s FA function I found that the operating expenses from 2011 to 2013 are 171.92, 265.25, and 1034 Million dollars. This increase in operating expense shows that twitter is innovating. Also using Bloomberg’s FA function I found they have been spending a lot of money on research and development keeping them ahead,
- 6. and limiting thethreat new entry. In 2013 they have increased the amount of money they invest towards research and development by 399 million dollars. - PS TWITTER CUSTOMERS Peter Steinmann There are two different types of customers Twitter has, Twitter users, and the advertising agencies/ companies that want to advertise on Twitter. The bargaining power of the Twitter users is very limited. The Twitter users really only have one way in which they could take down Twitter which is that they can decide to either use Twitter or not. This is a big power however Twitter is so big that Twitter would need a colossal collapse. Twitter’s growth is so huge you would need to lose double the growth per year to really make a substantial impact on the company. Twitter is not only for friends to talk or post about their feelings but its huge with news and sports teams, as well as other companies. So when your population consists of other companies it would be hard to imagine another company going out and creating something to destroy twitter. If a company destroyed Twitter they would be losing a means of customer service, and communication with their customers. An example of how companies use Twitter when using the EVT function in Bloomberg, I found a conference for Goldman Sachs where the head of technology for Goldman Sachs, James Covello, talks about how Twitter really helps when it comes to advertising information about meetings and conferences. This shows how companies utilize Twitter. Also at the SUNY Oswego Media Summit this year, Steve Levy stated that he uses Twitter constantly because it gets the information out there so quick and fast. However, the main customer that makes Twitter money would be the companies buying to advertise on twitter. Online advertising is a growing industry because so many things are done online. As you can see from the graph of digital ad spending from 2012 to 2018 (see below), which is found from using the BIP function in Bloomberg, it is projected that in four years from now the total money spent on digital advertising will almost double what it currently is spending. A bargaining factor that the advertisers have is the choice of which platform to advertise in and the other bargaining factor the advertisers have is how much money advertising on Twitter is worth. With a high about of users I’m sure that the advertisers would be paying a pretty penny to advertise with twitter. Also if you combine the increase in the number of Twitter users plus the projected increase in digital advertising that makes for great reason to advertise with twitter. Twitter has a very strong and bright future ahead of them. Twitters worst nightmare would be if the whole social media industry fell through or if Twitter became irrelevant which I don’t see happening any time in the near future. When I used the SPLC function in Bloomberg However there are only 123 companies that are customers of twitters and the revenue they receive from their top Customer Disney all accounts for 1.24% of their revenue. There are only 3 companies that account for 1% or 4 if you combine Comcast’s .92 % with Time warner’s .85% due to their recent merger which would make them their top customer at 1.77 percent, all the rest of the companies are less than 1% revenue. They do have some big name companies that are customers like Disney, Samsung, Microsoft, AT&T and Proctor & Gamble. - PS $105 $120 $140 $160 $178 $196 $214 $- $50 $100 $150 $200 $250 2012 2013 2014 2015 2016 2017 2018 DigitalAdSpending(Billions) Digital Ad Spending Worldwide, 2012- 2018
- 7. REVENUE PROJECTION &SENSETIVITY ANALYSIS In projecting Twitter’s future revenues, we chose to tie their revenue growth rate directly toward the growth rate of their ability to generate advertising revenue. Twitter mentions in their 10-K that their ability to generate advertising revenue is one of two variables that should be used to value the growth of their company; with the other variable being the growth in their monthly active users, or MAU’s. We conducted our sensitivity analysis by using the “=FORECAST” function in excel, which calculates or predicts a future value along a linear trend by using existing variables. Based off of the growth rate of Twitter’s advertising revenue, we forecast a 2014 advertising revenue amount of $600M. According to our model, a value of $600M in advertising revenue gives us 2014 fiscal year total revenues of $1,357.6M. After reaching this figure, we used the FA function on Bloomberg to see how our revenue projections compared to theirs. Bloomberg estimated 2014 total revenues of $1,306.5M, a figure that is only .21% off of our estimate. In projecting 2015 revenues, we estimated Twitter would grow their advertising revenue to $1 billion, resulting in total revenues of $2,183.5M. This is only off Bloomberg’s projection of $2,276.9M by 6.1%. We projected 2016 and 2017 total revenues of $3,009.84M and $3,628.80M, respectively (see chart below for visual display of revenues). To find how sensitive our 2014 total revenue projection is to a change in advertising revenue, we adjusted our advertising revenue by percentages of -20%, -10%, +10% and +20%. This gave us resulting 2014 projected total revenues of $1,109.80, $1,233.70, $1,481.50 and $1,605.40, respectively (See chart below for visual display of revenue sensitivity). Fiscal Year Ended 2010 2011 2012 2013 2014 E 2015 E 2016 E 2017 E Revenue (M) 28.3 106.3 316.9 664.9 1357.6 2183.5 3009.4 3628.8 Revenue Growth YoY 276% 198% 110% 104% 61% 38% 21% Advertising Revenue (M) 7.3 77.7 269.4 600.0 1000 1400 1700 Ad Rev Growth YoY 964% 247% 123% 67% 40% 21% % Change in Ad Revenue -20% -10% 0% 10% 20% Resulting Ad Revenue 480 540 600 660 720 Resulting Total Revenue (M) 1,109.80$ 1,233.70$ 1,357.60$ 1,481.50$ 1,605.40$
- 8. Outside Sources "A SWOTAnalysis of Twitter - Eyeflow Internet Marketing." Eyeflow Internet Marketing. N.p., n.d. Web. 27 Oct. 2014. "Loyal Users Key to Snapchat and Twitter Fortunes - FT.com." Financial Times. N.p., n.d. Web. 27 Oct. 2014. "The Strengths and Weaknesses of Social Media Platforms." Renelly Morel. World Press, n.d. Web. 22 Oct. 2014.