Authored By Ramaswamy Ranganathan & Sudarshan Rajan
The digital advertising world is a brutally competitive, in a hyper-competitive market, the shareholder returns do take an ugly turn unless the business clearly goes on to develop a strategy to create customer captivity. The business faces risks from rapid technological changes, change in customer preference, and new innovations which are disruptive in nature. In fact, these hi-tech companies are investing billions of dollars in moon shot projects, which are, if successful disruptive and game changing in nature.
Let us try to distill the Business perspective of Twitter and try to understand the reason for the stock to fire to dizzying heights, in the last 1 year the stock has witnessed rise of over 140%, what has gone right or probably going to go right in the future.
Let us understand in simple words, what is Twitter?
Given below is the perfect definition of what the platform is from the latest Annual Report
“Our primary service, Twitter, is a global platform for public self-expression and conversation in real time. Twitter allows people to consume, create, distribute and discover content and has democratized content creation and distribution. The reach of Twitter content is not limited to our logged-in users on the Twitter platform, but rather extends to a larger global audience”
From the above its clear Twitter must focus on users, and growth of users as it is a user generated content platform, and most of the new things today are breaking on Twitter, so network effects are vital for the company. The most vital question to ask then how does this company make money, it’s a no brainer that majority of the revenue must be advertising and in fact that has been the key for other user generated platforms like YouTube and Facebook, now that we know what the company stands for and how does it make money, now let’s dwell into the money making ability of the company by trying to distill ,what is working , because recently the Q1 of 2018 was a blowout and the business seems to be turning the ship dragging itself out from the shore to the ocean.
Let us try to distill the figures below and take a view on the same.
Source -Annual Report
Sales revenue growth has been amazing for the last 5 years, a CAGR of 29.73%, this is amazing for any company to deliver this kind of growth, only in 2017, it is throwing a marginal 38,74,0000 US$ operating income, please note that in the year 2017, the 2.44 Billion of Revenue can be broken down into Advertising revenue of 2.11 Billion and 333 Million of Data and licensing revenue, so as discussed above advertising must fire for the company to move on its feet and probably run a marathon.
Now in valuation, more than the income statement, the cash flows matter and let’s see what does the business throws up in cash flow statement.
Now this is interesting, even though the business has generated loss, the cash flow statement clearly is turning positive from 2015 and the free cash flows are positive and consistently have grown in trajectory, it is pertinent to note, business has started to generate cash and that is the most vital for any business, why is this important? simple any business is valued at future cash flows discounted at present value, this is simple Benjamin Graham 101, any business which throws out cash is far more wonderful than any business which generates only earnings in the Profit and Loss account.
Twitter has made certain changes to its main product, it has doubled the number of characters, and its Daily average user growth has been in the early double digit, it is obvious, that advertisers want eye balls, and if twitter is successful in delivering those, it will help the Media agencies in better ROI towards their clients.
Now let us see what has twitter really done to the planet in which we breathe, it has given every individual to connect with each other, share and most importantly it has shaped the way we consume news, it has given fans a way to connect to sports star, celebs and politicians with their grievance and more so over it has been a platform to level things, even the most powerful person on this earth is not spared if he or she messes up, in short, the product has been transformative.
The company was fixing its own issues on personnel front, and other major issues of vision and strategy which was ailing its growth, well you can’t with certainty say those things are over, but there is certainty that once the business seems to be turning around, most of the issues get resolved, as there is no point speculating that it was a flash in a pan, the green shoots are clearly visible and first Q1 was a total blowout in terms of all important parameters, international revenues especially from Japan was a total firing missile, and now Q2 would be announced soon , so it’s vital to keep a tab on the business and see how that pans out , we don’t see any pain with the world cup centering it should do well.
The business turning positive on free cash motivated us to use discounted cash flow and see what the value is for Twitter and given below is the estimate of the stock. In valuing the business we have taken the base of 2017 (Free cash flow) 670 Million and grown the cash flow by 20% each year till year 10 , derived the present value @ 8% discounting rate , and used a terminal growth rate of 2% , we have also used the net debt method , so deducted the cash and marketable investments from long term debt , other liabilities and capital leases.
The stock value comes around 53.6 dollars, the stock is trading at 45 dollars on 5th July closing, applying a margin of safety of 20%, stock is valued fairly, according to us, but the machine has just started its reboot, and markets do pay for future growth, slowly and surely the ship is cruising into that territory from the rocket is ready to launch and move into a different orbit.
The Authors Ramaswamy Ranganathan & Sudarshan Rajan are seasoned Media Professionals
(This is an authored article and views expressed do not in any way represent the views of tvnews4u.com)