Twitter Clean-Up, Video Push Should Boost Q4 Earnings Even If Users Slip

With the risk of government regulations on user privacy threatening to impede the growth trajectory of social media stocks, it’s becoming increasingly difficult to choose a potential winner from among this group. There's no doubt that regulatory intervention will make it much harder for sector players such as Facebook (NASDAQ:FB), Google (NASDAQ:GOOGL) and even LinkedIn (NYSE:LNKD) to monetize user data.

One way to make a better investment decision in this highly unstable situation is to focus on those companies which have been upfront about trolling and malicious content on their site and quick about removing spammy material from their platform, while winning ad dollars at the same time.

TWTR Weekly 2016-2019

Twitter is emerging as a winner on both these fronts. The San Francisco-based company has created its own momentum within the highly negative environment for social media stocks this past year. Shares gained 33% during the past 12 months, a period in which Facebook fell 5% and the benchmark NASDAQ was up just 6%.

Massive Cleanup, Video Content Paying Off

By quickly acting to clean up its platform, Twitter has convinced investors they should ignore user engagement numbers while the company makes its platform more acceptable to regulators. During the quarter that ended in September, Twitter’s monthly active users averaged 326 million. That’s a decrease of 9 million from the second quarter. Twitter warned in its July earnings report of a continued drop in that critical metric as a result of efforts to divest itself of questionable users and comply with stricter privacy rules in Europe.

In our view Twitter is playing it smart. In the current environment regulatory scrutiny will only increase as data breach issues continue across the sector.

Twitter has provided investors with transparency, by adopting an open approach to problems within its network. CEO Jack Dorsey has been warning investors since last summer that his platform won’t see user growth while the company carries out its massive cleanup operation.

Yet even as its aggressive cleanup exercise continues, Twitter has successfully squeezed out more revenue from advertisers, even while user growth has tailed off over the past two quarters.

As was highlighted in our previous post about Twitter, the company's success in attracting ad dollars is largely the result of its push to expand video content. That’s resonating very well with advertisers. We believe this strategy, which is one of the main components of Dorsey’s turnaround plan, will continue to strengthen Twitter’s appeal. The video segment now accounts for more than half of Twitter's ad revenue.

Twitter's real-time highlights and video partnerships have positioned the company as a broadcast and communications network, making it complementary to all other forms of media, including TV. Twitter is also well positioned to benefit from the large shift in dollars toward mobile and native advertising.

Bottom Line

With meaningful progress toward improving its content quality and advertisers’ willingness to value the platform’s transparency and strength, we believe Twitter will be able to attract additional user engagement going forward. The decline in the number of users will stop at some point this year.

These two factors will help Twitter stock, which closed yesterday at $34.37, continue its upward trajectory. We remain bullish on its long-term prospects.