Market Mad House

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

Long Ideas

Is Twitter Making Money?

Twitter (NYSE: TWTR) is cheap for a social media stock. Its shares were trading at $43.15 on 20 September 2019. In contrast, Facebook (NASDAQ: FB) was trading at $189.79 on the same day.

Moreover, Twitter generates some interesting usage numbers for a Social Media company. For instance, Statista estimates Twitter had 68 million monthly active users in the United States at the end of 1st Quarter 2019. That figure grew by two million from 1st Quarter 2018 when Twitter had 66 million active American users.

However, Twitter had only 48.65 million active users in the United States in July 2019, Statista estimates. In addition, Twitter’s largest markets are large affluent developed nations. Twitter had 36.7 million users in the United Kingdom and 14.1 million in Japan in July 2019, for instance.

Overall, Twitter had 330 million monthly active users globally in 1st Quarter 2019, Statista calculates. That number was down from 339 million monthly active users in 1st Quarter 2018.

To clarify, a monthly active user (MAU) is a person who visits a social media platform at least once a month. An active user, however, is a person who uses a social media app at least once a day.

Who is using Twitter?

A Social media platform’s only source of value is its users. Thus, investors need to identify Twitter’s users. Fortunately, Pew Research made a close examination of US Twitter users in April 2019.

Importantly, Pew reports that Twitter users have some that advertisers will like. The average of an American Twitter user is 40, or seven years under the US median age of 47, Pew estimates. Thus the average Twitter Tweeter is in the 18 to 48 demographic American advertisers favor.

Plus, the average Twitter user reports an annual household income of $75,000, Pew claims. That estimate is $13,628 more than the U.S. Census Bureau’s $61,372 estimate for real median American household income in 2017. Therefore, Twitter users have more money than average Americans.

Additionally, 42% of Twitter users hold a bachelor’s degree, Pew calculates. That is 11% higher than the national average. To clarify, Pew estimates 31% of Americans hold a bachelor’s degrees.

Oddly, Twitter users more likely to be Democrats even though Twitter is U.S. President Donald J. Trump’s (R-New York) favorite communications medium. Pew estimates 36% of Twitter users and 30% of Americans identify as Democrats. However, only 21% of Twitter users identify as members of Trump’s Republican Party. Notably, Trump identified as a Democrat for most of his life.

Thus Twitter members could be more liberal and open-minded, which means they could more likely to try new things. To explain, in America Democrats are liberal while Republicans identify as conservatives. Thus, Twitter users could be the people advertisers want.

Is Twitter Making Money?

Twitter’s attraction to the open-minded seems to pay off. Twitter reported revenues of $841.38 million and a revenue growth rate of 18.41% on 30 June 2019.

Specifically, Twitter reported a gross profit of $563.42 million and income before tax of $87.8 million. However, Twitter reported income tax expenses of $1.032 billion on 30 June 2019. Interestingly, Twitter’s net income was $1.12 billion before income taxes.

Thus, Twitter is making money, but it is apparently in trouble with the taxman. Twitter’s net income is higher than the revenues because it probably borrowed money or used cash and short-term investments to pay its income tax. That sounds like a poor business model to me.

Despite its possible tax troubles, Twitter generates some cash. It reported a free cash flow of $204.28 million, an operating cash flow of $338.97 million, and a financing cash flow of $3.95 million on 30 June 3019.

Appealingly, Twitter retains a lot of cash. For instance, Twitter had $2.183 billion in cash and equivalents $4.503 billion in short-term investments at the end of June 2019. Thus, Twitter had $6.687 billion in cash assets on that day.

Is Twitter a Value Investment?

Given those numbers I think Twitter is a value investment because it offers cheap stock, a lot of cash, and a growing social media that appeals to users with money.

Moreover, Twitter is unsexy and unattractive to many people because of its association with President Donald J. Trump. However, Trump is merely a customer, not the company. In addition, Trump is an example of the intelligent, and media savvy user, Twitter attracts.

Twitter is a poor income stock because it pays no dividend. Yet Twitter definitely has the resources to pay a good dividend, if CEO Jack Dorsey wishes.

If you are looking for a value investment in Social Media check out Twitter. It’s cheaper than Facebook (NASDAQ: FB) but has far less reach. In fact, I think Twitter could be the best Facebook alternative in today’s stock market.

Can Twitter compete with Facebook?

However, the risks at Twitter are great because it has to compete with Facebook’s social media empire.

Dramatically, I estimate Facebook’s various social media platforms had 6.225 billion active users in July 2019. Furthermore, three Facebook platforms, Facebook Messenger with 1.3 billion users, WhatsApp with 1.6 billion users, and Instagram with 1.3 billion users compete directly with Twitter.

Thus, Twitter is a value investment for those who want cheap growth stocks and are willing to take a risk. If Twitter survives, it could become a reliable income and dividend stock someday. However, to reach that point Twitter will have to compete with Facebook. Thus, Twitter is a stock for risk takers.