Investors Should Not Buy Twitter Inc Stock On Heightened Speculation

• Twitter has regained momentum in recent weeks despite concerns over ad agency spend.
• This is mostly due to TV licensing and an impending deal with Apple.
• However, until there’s supportive data on user engagement, investors should remain on the sidelines.

In a recent turn of events, Twitter (NYSE:TWTR) has been able to regain the attention of shareholders as the company has doubled down on its content licensing strategy to help boost user metrics. The company also reported low-single digit growth in MAUs in the prior quarter, so some of the issues on user retention and growth are being actively addressed by the company’s management team.

However, I’m somewhat cautious on near-term digital advertising revenue growth despite the improvement in feature set for the social platform. In the prior earnings conference call, Twitter’s management was able to address the feedback of analysts on the call by pointing to new ad formats and heightened ROI for agency ad spenders.

But, by those measures, I still believe competing platforms are better at addressing advertisers. As such, the recent momentum in the stock price has less to do with the usual banter over ad formats, monetization and etc., but rather the ongoing licensing of content deals.

Can Twitter address the issue of digital ad budget dislocation?

In the past quarter alone it was estimated by Morgan Stanley that the United States advertising market grew by 5 percentage points. However, the growth seems disproportionately allocated towards competing platforms especially within the social space. In terms of conventional newsfeed advertising, Facebook took the lead while YouTube retained control over video advertising.

Source: Morgan Stanley

Twitter’s competitive dynamic isn’t exactly appealing because it’s difficult to argue why Twitter will remain more relevant than either YouTube and Facebook in social and video. However, the narrative started to shift after the company continued to sign on some of the major sports leagues to license online content, which seems somewhat reticent of Yahoo’s bid to increase engagement via the expensive licensing of content.

But what differentiates Twitter is the heightened engagement of Twitter users during live events, as the live content feed of Twitter tends to be more responsive during local, national and global sports events.

So, here’s what happened after Twitter signed Thursday Night Football

Given the strong response from investors following the signing of Thursday Night Football and overall compatibility with live broadcast, Twitter was able to sign even more deals. This helps to address the need for additional content, as Football games are limited to Q4’ and Q1’ results.

In a more optimistic scenario, I can imagine Twitter’s gross profit from Thursday Night Football reaching $44 million (after subtracting $10 million in content licensing cost) assuming average user impressions at 10 million per game.

I illustrated this impact in a prior article on Amigobulls.

That being the case, Twitter has been on a content licensing spree, which translates into incremental growth levers that can immediately contribute to profitability.

The New York Times reported on Twitter’s recent efforts in content licensing:

Since April, Twitter has signed a series of live-streaming deals, including with Wimbledon, CBS News, the National Basketball Association, Major League Baseball, the National Hockey League and Pac-12 Networks. Twitter is also in discussions with other organizations, including Major League Soccer and the Professional Golfers Association, for similar agreements, according to people briefed on the talks.

I’m assuming Twitter will successfully sign contracts with some of these other sports leagues as well. Given the initial buy-in of the NFL (the largest sports league in North America) the remaining leagues will likely favor a deal with Twitter when compared to Facebook and YouTube.

Both Facebook and YouTube are too disruptive to the conventional TV viewing model, as it may spark concerns over renewals from some of the old vanguard broadcasters (CBS, NBC, FOX and ABC).

As such, the league associations are likely looking for incremental opportunities that aren’t too disruptive to the core TV network model, but provide some web presence so that mobile and online viewers can watch some live game footage.

This is by no means a massive transition for sports broadcasting, but rather an incremental step to regain the awareness of viewers that have either cut cord, or are contemplating other content mediums. It’s more like an entry-level product, as opposed to a replacement for a TV bundle & subscription package.

The millennial cohort is the most disengaged from live television, whereas Twitter has a disproportionate audience that composes 32% of the 18-29-year-old internet demographic, according to the Pew Research Center. Furthermore, according to a UBS survey conducted in the month of April, approximately 50% of the millennial respondents reported higher usage of Twitter.

Twitter is expanding platform reach

As per a recent report, Twitter is currently negotiating with Apple to bring the application to Apple TV. While the installed base of Apple TV isn’t as substantial as mobile or desktop, the recent efforts to license content could make the app more readily appealing for a living room audience.

Furthermore, the biggest contention between Apple and Twitter is the method of monetization, as Apple doesn’t earn a split between the advertisers and app providers. Typically, Apple earns a royalty as a percentage of in-game purchases or application licenses. TV applications also distribute earnings to Apple as a revenue split for subscriptions. The OTT (over the top) split is usually at 85/15 with Apple taking 15% of the net revenue from subscriptions.

However, the opportunity to live stream Thursday Night Football is perhaps the biggest reason for Apple’s sudden openness to include Twitter into the Apple TV ecosystem. While the platform is inherently designed for streaming and light gaming, the opportunity to broadcast sports content in conjunction with Siri API integration with Twitter creates more of a holistic approach for active social media engagement on the TV platform.

In other words, investors should anticipate more than just a live viewing experience from Twitter, but perhaps a TV-friendly version of Twitter that works intuitively on Apple’s box.

Final thoughts

While I’m not ready to buy into a substantiated turnaround in core audience metrics, I believe that the recent efforts to license content are driving TWTR valuations higher. Given the improving market sentiment and heightened sentiment in the digital advertising space, Twitter is gaining the benefit of the doubt without demonstrable growth in both DAU/MAU metrics.

The licensing of sport/news content should translate into heightened levels of engagement going forward, but the degree to which it will impact user metrics is difficult to determine as the inclusion of these features will become a bigger draw to the pre-existing user base, rather than a meaningful driver of user growth in the near term. In other words, I believe impact will be in terms of active engagement and retention as opposed to meaningful contributions to Twitter’s total user base.

To conclude, I continue to reiterate my hold recommendation on Twitter. The narrative has certainly improved, but without supportive data – Twitter remains highly speculative.