Source: PaxForex Premium Analytics Portal, Fundamental Insight
Twitter set ambitious growth goals during its presentation to analysts in February 2021. The social media company said it could increase the number of monetizable daily active users (mDAUs) from 192 million at the end of 2020 to more than 315 million by the end of 2023, and more than double its annual revenue, from $3.7 billion in 2020 to "more than $7.5 billion" in 2023.
Those goals initially impressed investors, but the sudden resignation of CEO Jack Dorsey last November overshadowed those plans. His successor, Parag Agrawal, was also a controversial choice, as he once said that Twitter's role was to "not be bound by the First Amendment."
These disagreements eventually led Tesla CEO Elon Musk in late April to launch an aggressive offer to buy the entire company for $44 billion. Twitter eventually agreed to the deal, but Musk later accused the company of inflating user numbers through bots and spam.
As a result, the deal remains in limbo, with Twitter stock trading more than 40 percent below Musk's "best and final" offer of $54.20 per share. But for now, smart investors should keep in mind three other things about the company that could ultimately affect the outcome of this convoluted deal.
1. Twitter has repeatedly struggled to count its users.
Unlike most other social media companies, Twitter has repeatedly adjusted its user measurement standards over the past few years. Back in 2014, the company admitted that "about 8.5%" of its active users were likely bots that "automatically contacted our servers for regular updates without any apparent additional user-driven action."
In early 2015, the company suddenly lost about 3 million monthly active users (MAUs) after Apple stopped allowing its Safari browser to automatically receive links from user subscribers on Twitter. Up until that point, Twitter had counted those automatic requests as "active" users. It lost another 1 million MAUs after Apple's iOS update temporarily broke its password encryption system.
In 2019, Twitter replaced the MAUs, which had been declining, with mDAUs to emphasize the increase in monetized users. But during its first-quarter report in April of this year, the company admitted that it had inadvertently counted multiple accounts tied to a single user as separate DAUs over the past three years. The company said that miscalculation only reduced the total number of mDAUs by less than 2 million, but it sowed further doubt about its ability to consistently measure its core audience.
In its first-quarter report in May, Twitter claimed that less than 5 percent of its mDAUs were "false or spammy accounts." Musk disputes this claim, and the acquisition will likely remain in limbo until this dispute is resolved.
2 The data licensing business is controversial.
Twitter gets most of its revenue from advertising, but its data licensing business (now known as the "subscriptions and other" segment) accounted for 8% of total revenue last quarter.
This business licenses a "firehose" of public tweets to large customers for analytical purposes. However, some of its applications are highly controversial.
High-frequency trading (HFT) firms use this "firehose" to make quick trades, which has probably contributed to several "flash crashes" in recent years. The media often uses this stream to track the latest developments, but weak fact-checking standards can lead to the spread of fake news.
The Saudi government has also reportedly used this "firehose" to hunt down and harass dissidents, which should raise some concerns due to the fact that Saudi Prince Al-Waleed bin Talal Al Saud is the second-largest shareholder of Twitter after Elon Musk. Earlier this month, the company made the stunning move of giving Musk full access to all of its firehoses to address his problems with bots and fake accounts.
3. The company recently paid out huge legal fees.
Over the past year, the company has lost nearly $1 billion to lawsuits. Last September, the company agreed to pay $809.5 million to investors in a class-action lawsuit related to some goals the company set in 2014.
At the time, Twitter said it could achieve more than 550 million MAUs in the "interim" and more than 1 billion MAUs in the "long term." In the fourth quarter of 2018, however, the company achieved only 321 million MAUs, and in the first quarter of 2019, it gave up that figure altogether. This massive settlement was the main reason the company posted a net loss of $221 million in the fiscal year 2021.
In May of this year, Twitter agreed to pay $150 million to settle a privacy lawsuit with the Department of Justice (DOJ) and the Federal Trade Commission (FTC). The company was sued for "inadvertently" using its users' phone numbers and email addresses to create targeted ads.
These settlements probably won't affect Twitter's long-term growth, but they highlight the company's propensity to overpromise and under-deliver, making careless and costly mistakes.
It might be tempting to buy the stock now, but the company faces many challenges in the short term. If Musk eventually quits, Twitter may continue to struggle to expand its audience and remain relevant in the maturing social media market as a recession looms on the horizon.
As long as the price is above the 35.50 level, follow the recommendations below:
- Time frame: D1
- Recommendation: long position
- Entry point: 37.07
- Take Profit 1: 40.70
- Take Profit 2: 44.50
Alternative scenario:
If the level of 35.50 is broken-out, follow the recommendations below:
- Time frame: D1
- Recommendation: shortposition
- Entry point: 35.50
- Take Profit 1: 32.00
- Take Profit 2: 30.00
