Of all the big tech stocks, the most interesting at the moment, at least from an earnings perspective, is Twitter (TWTR). Sure, Elon Musk’s tendency to overshare his optimism makes any announcement from that company (TSLA) entertaining, and Amazon (AMZN)’s continued quest for world domination leads to some incredible numbers, but there is something fascinating about Twitter’s story of early struggles and their turnaround. As that turnaround continues, its progress offers some important lessons.
By the time of their IPO in November of 2013, Twitter was already a fixture in American culture, but it quickly became clear that popularity verging on ubiquity did not translate to an ability to make money. Their transition to profitability has been quite the story to follow. It has shown that, as Bezos and Amazon had demonstrated before, making money is sometimes about choosing to do so.
For a young, privately held tech company, particularly in the social media space, growth is everything. The best way to maximize the return for early investors from an IPO is to show rapid growth and massive potential. Once the public becomes investors, and owners in the new company, other things start to take priority.
Everybody claims to love growth, but at some point, hard-nosed fund managers start to mutter, “show me the money.”
For Twitter, as new competitors emerged, such as Snapchat (SNAP) and Instagram, now owned by Facebook (FB), growth inevitably slowed, those mutters quickly turned to full-throated cries. Management, however, possibly inspired by Amazon, turned a deaf ear and continued to pursue user growth at all costs. By the end of 2017 though, with the stock trading at around half its IPO price, the attitude changed, and monetization became a priority.
The transition, while successful, has not exactly been smooth. It came at a time when Twitter, along with other social media companies, faced criticism of the content that they allowed, or some would say encouraged. The basic principles of free speech and anonymity that the platform was based on led to an inability, or maybe an unwillingness, to control “fake news” and abuse. That changed recently when the company announced they were closing such accounts and would be better monitoring content going forward.
This morning’s Q1 earnings report contained a clear message in that regard: restricting such content may ding user growth numbers as measured by traditional metrics, but it pays off. It leads to greater engagement, and therefore greater potential for monetization. Restricting the hate and venom on the platform has led to criticism from some quarters, but it is the right thing to do, and in this case that is true not just morally, but also financially.
Twitter’s Q1 earnings easily beat expectations and, on an adjusted basis, came in at $0.37, more than double last year’s $0.16 for the same period. They also showed good growth in Monetizable Daily Active Users (mDAU), a new metric that the company invented recently. While some were critical of that move, suggesting that it was massaging the numbers to the company’s benefit, it is actually, as I suggested last month, a more useful measure of the success of the new, profit-focused Twitter than the old MAU numbers.
Who cares how many people log on occasionally? What counts is the ability to expose those users to advertising content, and Twitter’s willingness to report that shows a welcome confidence in their approach. It certainly seems that advertisers appreciate it. Ad revenue was up 20% year over year on a constant currency basis in what has been a difficult time for social media as a whole.
Twitter’s recent history is a story with implications for media companies, both social and traditional, and for corporations more generally. It shows that capitalism works, albeit sometimes in counterintuitive ways. Public ownership drove the company to focus on profit, which then caused them to make a difficult decision to exert some control over content. I understand the free speech arguments there, but there is no doubt that it has improved the level of discourse on the platform and the user experience.
The overarching lesson after this morning’s earnings is that far from damaging a company’s prospects, sometimes doing the right thing can actually pay dividends.