In Difficult Environment For Social Media, Twitter (TWTR) Still Looks Like A Buy

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It is a tough time for social media. Around the world, people are becoming increasingly aware of the downside of user-created content and blaming the platforms for what is posted there. There is a big-picture philosophical debate to be had there, but it will have to be conducted with the knowledge that the genie is out of the bottle.

Social media as a method of communication and news dissemination is not going away, and the big players in the industry are starting to make changes to their platforms to increase accountability and promote accuracy. In addition, though, they are also becoming savvier about increasing engagement.

The latest change to Twitter (TWTR)’s platform is a case in point.

They are now allowing users of their app to simply swipe to access their phone’s camera to facilitate the posting of pictures and video. To some, that no doubt looks like a belated response to the growth of Instagram and other image-related platforms, but it is being done from a position of strength and addresses something that has been a problem for Twitter in the past: monetization.

It is impossible to deny Twitter’s place in society. A huge percentage of news stories now mention Twitter. It is the preferred communication method of everybody from sports stars and journalists to the President of the United States. Since its early days, however, Twitter has faced an inherent contradiction: Its character limit and rapid-fire style mitigates against watching and reacting to advertising.

Increased video content will go some way toward solving that problem. We have become accustomed to ads at the beginning of online video content and increasingly accepting of them as a price to pay for access to “free” content.

Video advertising is already important to the company, accounting for over half their revenue last year, so anything that increases video content has to be a good thing for their bottom line. In its last earnings release and subsequent conference call, Twitter seemed to be positioning itself for this move. They announced a move away from the usual Monthly Active User (MAU) metric and to a new one that they created, monetizable Daily Active Users (mDAUs).

This addresses a problem with the old metric; popularity is not necessarily related to profitability. By counting users who can be exposed to advertising, Twitter is confronting that head on and the switch is an indication of a new-found confidence in their ability to excel in that area.

Even so, the stock dropped significantly after those earnings, largely due to a disappointing revenue forecast, and has stayed at those lower levels as the broader market recovered this year. That is hardly surprising as analysts will have adjusted their expectations accordingly, but now that all that is baked in, the future for the stock looks good.

The trailing and forward P/Es of around 20 and 30 respectively don’t scream value but, given how Twitter only began focusing on monetization relatively recently, growth, even in a difficult environment for social media, is a reasonable expectation. That is why the stock’s PEG ratio, which factors that in, is at a very attractive 0.82 (a reading below 1 is considered positive for a stock).

For a long time, Twitter focused on user growth and becoming a fixture of modern life above all else, and many, including me I will admit, questioned that at a time when Facebook (FB) and others were monetizing like crazy. Now though, with the benefit of experience in what users find acceptable advertising, they are tweaking their product accordingly and significant gains in the stock look likely as a result.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing , Investing Ideas , Social Media , Stocks , Technology
Referenced Symbols: TWTR

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