Twitter Saturation

Twitter

A basic look at twitter. A major social media platform that operates in the space of FB, SNAP, Instagram and other social platforms. The users can write limited size (140 or 280 character articles and add images and videos).

The chart below shows the monthly average users, MAU.

Points to note:

  • MAU is saturating
  • MAU is 336 million, which means DAU is ~ 10 million.

The actual figure more MAU is interesting as it is common for individual to have multiple accounts and therefore appear as many users. If this was not adjusted for, then the real user base would be lower (potentially by a factor of 2).

Next we look at public data and observe total revenue.

Again, the market observes a saturation of revenue for a 2 year period (from q4 2015 to q1 2018).

As with many internet models, one might start with the assumption of world population of 7 billion1 and, say actual internet users of 3 billion2. This means that twitter MAU represent  ~ 5% of internet users (one person in every 20).

Logically, with the above, one could point out that there is significant scope for growth, say from 5% to 25% (which would be 5x). However, the data clearly shows that this is not the case. Twitter has potentially reached its saturation point (steady state). So one needs to ask the question as to why with some answers being:

  • a certain % of people will not use social media.
  • other competing social platforms are taking market share.
  • twitter will never fit 100% of uses.

There will of course, be any other reasons and factors.

With this to hand, one now looks at the business model.

  • Gross profits are 65% of total revenue (so cost of revenue is 35%).
  • R&D is 25% of total revenue.
  • SG&A3 is 40%.

With the above, this leaves little of the table (zero %) for shareholders. If one assumes that R&D can be cut to 15% and SG&A reduced to say 30% that would leave a 20% net profit on revenue. With the company generating $2.5 billion of revenue per year, this equates to a net profit of $500 million. At 10 x earnings, this would value the company at $5 billion (and at 20 x earnings $10 billion).

Interestingly, the market cap at the time of writing is $33 billion which is significantly above the estimates produced.

It is understood that the bulk of revenue comes from advertising. So will adverting revenue increase if the user base remains static ?, the answer to this is a potential yes as more advertising campaigns get rolled out, however, this will be limited as users have an advert tolerance and the user base appears to have reached its steady state for now.

Will the margins increase?

It is expected that this may be the primary gain. At some point, as the company matures, investors should expect to see a return in absence of this, the share-price would normalize to market levels (although a comparable such as facebook [FB],  indicates the norm is 30x at lest for now).

Twitter Blockchain Influence’s

As a side note, the reader can find out more about some of Twitters larger block-chain influencer’s on coincentral measured by number of followers. Typically those such influencer’s range between 250,000 to 1 million followers.

Conclusion

Gone are the 100x earnings. The social space is aging well and Twitter is very much in the mix of business and competition. Whereas in the past, user growth alone was acceptable, with the evidence of slowing (static) user growth, the company will need to show investors an real net profit over the next few years. If user growth was to materially decline, the would become problematic.

Comments and feedback is welcome.

As usual, if you have any questions, please feel free to contact LEM solutions via the contact form or email or twitter.

  1. http://www.worldometers.info/world-population
  2. data from wikipedia indicates 3.1 billion users as of 2015
  3. Selling general and administrative

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