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Morningstar | Twitter Likely to Maintain Profitability and Expand Margins

Twitter has captured the attention of nearly 320 million users, including prominent celebrities and public figures worldwide, and its access to, and interactions around, real-time information and content create more value for its users and for advertisers. However, Twitter’s slowdown in user growth remains a concern, and as the firm continues to invest in product enhancements and live video content, lack of a turnaround in user growth has made user monetization an increasingly difficult task. We no longer believe that Twitter has carved out a narrow economic moat. Twitter is an open distribution platform for (and a conversational one around) short-form text, image, and video content. Its users can access real-time information regarding a very wide array of topics or news events. They can also share information and content, interact with content, and/or express their reactions to other Twitter users. These types of interactions allow Twitter to compile more data about its users, their interests, and their behavior, which is then either licensed and/or utilized by Twitter and advertisers to launch online target ads. While Twitter remains one of the main real-time online content distribution platforms, the firm’s user base and its growth lag other social networks such as Facebook (including Instagram) and Snap’s Snapchat. As such, Twitter is not benefiting from increased spending on mobile and online video advertising nearly as much as its peers.Product enhancements such as the Explore tab, the addition of the Tweet Activity feature, and the Engage and Dashboard apps may have helped increase initial user engagement and improve user retention, but the firm’s network effect has weakened considerably given the disappointing new user growth. As the likelihood of Twitter attracting more users via content improvement and increasing focus on more live premium content has declined, so has the firm’s access to more user data, thus not enhancing the value of that intangible asset nor attracting more advertisers to drive further revenue growth in pursuit of becoming a profitable company.