We’ve been following the ‘Twitter’ search trend for some time and have commented extensively on the continual downtrend in searches as a definite point of concern for potential investors. We continue to maintain our concerns over the search trend as most recent data points to a slow down in Google searches for the term ‘Twitter’ to a level last seen in late 2011.
The negative trend has prevailed for three years strong and shows no signs of letting up. There are a few reason why this trend is occurring, the first of which has to do with changes in Internet usage habits which we’ve commented in prior posts. This has to do with the increased adoption of web/mobile applications, which in the case of Twitter has seen a significant shift from desktop/laptop. In the 2015 annual report, management cites 80% of monthly active users using mobile to access content.
INTERNATIONAL SEARCH TREND
The most recent Management Discussion and Analysis mentions:
“…in the future we expect our user growth rate in certain international markets, such as Argentina, Brazil, France, India, Japan and the Philippines, to continue to be higher than our user growth rate in the United States” (Reference: 2015 Annual Report MD&A)
This is a very interesting statement. Management is of the opinion that user growth will continue to be higher in specified jurisdictions. We thought of putting that statement to the test by comparing ‘Twitter’ searches in the U.S. against searches isolated for the mentioned jurisdictions. If searches in the mentioned jurisdictions were decreasing at a greater rate than the U.S., this would suggest Management’s expectation for the mentioned jurisdiction in question were over-estimated and vice versa. The findings were quite revealing:
Brazil, India & Japan: The search trends for these countries are quite similar; searches increased till the later parts of 2011 then slowly diminished. In the case of Brazil, searches for the term saw a much steeper decrease than any of the other countries listed.
Argentina: The search trend in this jurisdiction observed the longest uptrend, however the decrease in trend which began in late 2014 has seen searches fall to the same level as that of USA and France and will shortly fall to a level below that of both countries.
France: The search trend in this country was very similar to the USA; when the search trend was up in the USA, it was also up in France, and vice versa. Since 2013, search trends in both countries have diminished at the same pace.
Philippines: This jurisdiction was the only one where searches bucked the trend where other countries observed decreases in trends for the term, the Philippines experienced more of a leveling off with a temporary spike in 2015.
Assuming you’re a new to the platform and were looking to understand a little more about it or perhaps find out where to download it, a segment of those may start off with a Google search. (We assume those whom adopted the platform have no need of accessing the platform via Google or a Google search.) A continued uptrend in searches in the respective country would suggest an increase in adoption while a decrease suggests the opposite. Suffice to say, while it may be the case that user growth in the above-mentioned jurisdictions are greater than that of the USA, the search trends are all pointing downward suggesting that interest in the platform is waning and in some cases, very quickly.
WHY SHOULD WE CARE?
Management sends a very clear warning to investors:
“Our user growth rate has slowed over time, and we anticipate that it may continue to slow or decline. To the extent our logged in user growth or user growth rate continues to slow or the absolute number of logged in users declines, our revenue growth will become increasingly dependent on our ability to increase levels of user engagement on Twitter” (Reference: 2015 Annual Report MD&A)
Combine this warning with the decreasing search trend in five of the six countries referenced by management as having greater user growth than the USA should be a clear sign of a continued decline in user growth. As user growth and interaction with the platform wanes, so will Twitter’s ability to generate revenues. We make the case that we’re starting to see this over he last year.
THE TREND AND TWITTER FINANCIAL PERFORMANCE?
Twitter’s financial fate is fundamentally tied to the number of users adopting the platform and their respective engagement. We have established that user growth is waning globally (with some exceptions) and there are signs that there is a slowdown in engagement growth as well:
|Q2-2014 Monthly Active Users Increase||6%|
|Q3-2014 Monthly Active Users Increase||5%|
|Q4-2014 Monthly Active Users Increase||2%|
|Q1-2015 Monthly Active Users Increase||6%|
|Q2-2015 Monthly Active Users Increase||3%|
|Q3-2015 Monthly Active Users Increase||1%|
|Q4-2015 Monthly Active Users Increase||0%|
We further the point made by management that financials are tied with user growth and interaction with the platform by looking at annual revenues:
*Reference: Google Finance
Our point may not be coming across by simply looking at the revenue chart. However, breaking down these figures to growth rates, we notice that 2015 revenue growth saw a significant decrease:
|2013 Revenue Growth||110%|
|2014 Revenue Growth||110%|
|2015 Revenue Growth||58%|
Most importantly is Twitter’s ability to turn a profit, which it hasn’t done since its inception. Those looking at Twitter stock in a positive light may point to observed decreases in annual net losses over the last three years and supplement this by noting 3rd and 4th quarter 2015 decreases in user engagement costs of 39% and 41% respectively. Despite all of this, the company’s net loss is still substantial, with 2015 annual loss amounting to $521 million. To get out of the red, it would appear Twitter will need to increase user engagement and user growth which is becoming increasingly difficult judging but the Google Search Trends in the USA and globally.
Since Twitter’s IPO, investors have experienced a precipitous drop in share price. Naturally, Twitter has taken many steps to turn things around such as bringing back its founder Jack Dorsey as CEO and bagging the NFL as a client. As promising as this looks, this does not change the fundamental trends in revenues and user growth. Furthermore, if Google Trends is any indication of things to come, it would appear that Twitter stock may have more downside.