Twitter’s Transparency Gives It An Advantage: Buy It On Weakness

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In this market, there is no dearth of bad news for once-high-flying social media companies. While Facebook (NASDAQ:FB) faces a crisis of credibility, the operator of Snapchat has been dragged down by falling number of users and a Department of Justice and SEC probe.

In this environment there is one social media company doing many things right—and being rewarded by investors.

Twitter Inc (NYSE:TWTR) has fared better in this downturn than other big social media players. At around $33, its stock is still up about 35% for the year. Facebook and Snap are in deep trouble, facing double-digit losses.

Twitter’s Transparency Gives It An Advantage: Buy It On Weakness

Twitter Weekly Chart

That’s surprising at a time when social media companies have been under extreme pressure to clean their networks of political manipulation, fake accounts and hate speech.

Twitter has not only performed well by financial metrics, but has continued to make its network more attractive for advertisers. In the most recent earnings period, it was obvious that Twitter is benefiting from its strategy of focusing on improving revenues and cleaning up its network.

Twitter’s push to add more live video and personalized content is one of biggest drivers of its growth in revenue, which jumped 29% in the third quarter. That was the third-consecutive period of double-digit growth. Twitter also reported positive net income for four straight quarters.

One difference between Twitter and other social media stocks is that while investors severely punish other companies when they miss on their user-growth targets, they are willing to tolerate slippages on this key metric by Twitter.

While sales and earnings have grown stronger, Twitter has suffered from a drop in user metrics, especially after purging its ranks to eliminate fake accounts ahead of the U.S. midterm elections early this month.

Monthly active users averaged 326 million in the third quarter, a drop of 9 million from the second quarter. Twitter warned in its July earnings report of a continued drop in the metric as a result of efforts to clean up its service and stricter privacy rules in Europe. The company said those trends will continue and lead to another decline in monthly users for the fourth quarter.

Monetization Is Gaining Pace

In our view, investors will continue to be lenient regarding Twitter user growth as long as the company’s turnaround strategy is showing positive results. Video content, which is one of the main components of CEO Jack Dorsey’s growth initiatives, will continue to strengthen Twitter’s appeal to advertisers. For the previous four quarters, video has accounted for more than half of its advertising revenue and remains the fastest-growing ad format.

Twitter’s strategy of partnering with content providers to build sizable awareness and exposure for things Twitter users care about is also paying off. Twitter’s real-time highlights and video partnerships have positioned the company as a broadcast and communications network, making it complementary to all other forms of media, including TV.

Early this year, Twitter launched a less-data-intensive version of its service called Twitter Lite. That’s part of the company’s efforts to attract users in low-data, remote parts of the world, such as India, where Twitter found the “app was way too slow to access.”

These new areas of growth aren’t going to dry up as Twitter deploys more resources to monetize its huge user base.

Bottom Line

After reporting profits for the fourth-straight quarter and with a strong jump in sales, Twitter is on track to reap the benefits of its turnaround strategy. The company has been very upfront about the impact of its network cleanup campaign on user growth and we think investors like this visibility.

The current selloff in Twitter stock, triggered by the general weakness in the technology sector, is a good buying opportunity for long-term investors. The company is going through a tough balancing act as it spends for growth and cleans up its network. But as its product continues to improve, we believe both users and ad growth will come back strongly.

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