Market Mad House

In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. Friedrich Nietzsche


Can Twitter Make Money?

Investors ask can Twitter make money because the social media service has a long history of losses. However, financial data indicates Twitter (NYSE: TWTR) is now making a little money.

For instance, Twitter reports a gross profit of $640 million and revenues of $909 million for 4th Quarter 2018. In addition, Twitter records an operating income of $207 million and a net income of $255 million for the same period.

However, Twitter’s performance is a joke when compared to Facebook (NASDAQ: FB). In comparison, Facebook records a gross profit of $14.118 billion and revenues of $16.914 billion for 4th Quarter 2018. Moreover, Facebook reports an operating income of $7.82 billion and a net income of $6.882 billion for the same quarter.

How Can Twitter Make Money?

To be fair, Facebook owns four of the world’s largest social media platforms. In detail, those platforms are Facebook, WhatsApp, Facebook Messenger, and Instagram.

Meanwhile, Twitter operates one social media solution with 326 million users, Statista estimates. Conversely, Facebook’s platforms have 6.071 billion users. In detail, Facebook had 2.271 billion users, WhatsApp had 1.5 billion users, Facebook Messenger had 1.3 billion users, and Instagram had one billion users in January 2019.

An obvious conclusion you can draw here is that you have to be as big as Facebook to make money in social media. Tellingly, the only social network that rivals Facebook’s services in size is Alphabet’s (NASDAQ: GOOG), YouTube which ad 1.9 billion users in January 2019, Statista calculates.

Therefore, a social network as small and as limited as Twitter might never make money. Instead, Twitter’s future could be as the part of a larger organization.

Not surprisingly, Twitter stock is cheap when compared with Facebook. Specifically, Twitter traded at $32.88 a share on 29 March 2019, while Facebook traded at $166.69 a share.

Is Twitter Making Money?

However, Twitter is generating cash. Notably, Twitter reports an operating cash flow of $332 million and a free cash flow of $263 million for 4th Quarter 2018.

Those numbers helped accumulate $6.209 billion in cash and short-term investments at the end of 2018. Specifically, Twitter had $1.894 billion in cash and equivalents and $4.315 billion in short-term investments on December 31, 2018.

Impressively, Twitter’s revenue, gross profits, and income are growing. For example, the gross profit grew from $514 million in September 2018 to $640 million in December 2018.

In addition, Twitter’s revenues grew from $758 million in 3rd Quarter 2018 to $909 million in 4th Quarter 2018. Moreover, Stockrow estimates Twitter’s revenue grew at a rate of 24.23% in 4th Quarter 2018.

Conversely, Twitter’s net income fell from $789 million in 3rd Quarter 2018 to $255 million in 4th Quarter 2018. In contrast, Twitter’s operating grew from $92 million in 3rd Quarter 2018 to $207 million in 4th Quarter 2018.

Twitter Proves Social Media Can Make Money

Thus, Twitter proves smaller social media networks can make money. However, Twitter demonstrates the limits to smaller social networks’ money making capacity.

Twitter‘ structure limits the company’s moneymaking potential because it operates mostly in North America and English-speaking countries. In contrast, Facebook’s networks operate all over the world.

For example, WhatsApp has 200 million users in India and 120 million users in Brazil, Business of Apps calculates. In addition, one WhatsApp feature, WhatsApp Status has 450 million users worldwide.

Interestingly, WhatsApp is popular in Europe with an 85% penetration rate in the Netherlands; an 83.1% use rate in Spain, and an 83% use rate in Italy. Therefore, Facebook owns the social media markets in those countries through WhatsApp.

However, WhatsApp has only 23 million users in the United States. On the other hand, WhatsApp; unlike Twitter loses money. Thus being big does not make social media profitable.

Can WhatsApp Make Money?

Consequently, Mark Zuckerberg is trying to monetize WhatsApp with targeted advertising and paid messages.

For instance, WhatsApp will charge big companies like Uber 0.5₵ to 9₵ to send messages to their customers, MarketWatch claims. In addition, advertisements will appear in WhatsApp’s Status feature.

Twitter investors need to worry about these efforts because WhatsApp is a dangerous competitor. Paid messaging; in particular, could encourage business to switch to WhatsApp for messaging.

Can Twitter Compete with WhatsApp?

Moreover, WhatsApp offers attractive features that Twitter lacks. For example, WhatsApp offers end-to-end encryption, and Twitter does not. That means WhatsApp encrypts an entire conversation but Twitter does not.

Thus, WhatsApp offers more security and privacy than Twitter does. However, critics like Gregorio Zanon allege there are serious holes in WhatsApp’s security.

Even with potential security holes, WhatsApp’s encryption will make it more attractive to business. Moreover, WhatsApp could offer financial services and payments capabilities.

Notably, they are testing WhatsApp Pay; a peer-to-peer (P2P) payments solution similar to Venmo, in India. Under those circumstances, WhatsApp could one day perform business functions like payroll and accounts payable. In addition, they could use WhatsApp for banking or lending if WhatsApp Pay works.

Who will Acquire Twitter?

Therefore, I think Twitter will have to add encryption and payments to survive. However, I believe Twitter lacks the resources to add such amenities.

Hence, Twitter’s best chance for survival is a merger with or acquisition by a larger organization. The most logical buyer is China’s Tencent Holdings (SEHK: 700) which owns WeChat and WeChat Pay.

However, political ramifications will probably keep Tencent from touching Twitter. Notably, the acquisition of President Trump’s favorite toy by a company with close connections to Beijing will ignite a firestorm of controversy.

Will PayPal Acquire Twitter?

Closer to home there is PayPal Holdings (NASDAQ: PYPL) which owns the fast-growing Venmo and America’s most popular digital wallet. I think combining Venmo and Twitter makes sense.

To explain, P2P apps like Venmo and WhatsApp Pay allow you to send money through encrypted messages. I don’t think Twitter will survive if its competitors offer encryption and P2P capabilities.

However, the heavily-encrypted Telegram; which lacks Twitter’s sleazy reputation and controversy, could be a better fit for PayPal. Importantly, Telegram is exploring the possibility of adding financial services via a cryptocurrency, CCN claims.

Why PayPal will not buy Twitter

PayPal could say no to Twitter because Twitter will have to offer end-to-end encryption to offer payments. To explain, nobody cares if gossip or news; Twitter’s primary products, are secure but they want their money to be safe.

Consequentially, PayPal will need to spend several billion dollars encrypting Twitter to make it a viable payments solution. Hence, adding messaging to Venmo could be a smarter move.

Thus, Twitter will have to up its game in encryption and security to compete with WhatsApp and potentially Telegram or PayPal. However, Twitter probably lacks the resources to achieve those goals.

Therefore, I conclude Twitter will never be a major player in social media. Thus, Facebook (NASDAQ: FB), Tencent Holdings (OTCMKTS: TCTZF), and PayPal (NASDAQ: PYPL) are better investments for those who want to cash in on the social media boom