Twitter Stock: How Will MoPub Sale Impact Business Forecast? (NYSE:TWTR) (2024)

Earlier this month Twitter (TWTR) issued a release that it would sell MoPub to AppLovin for $1.05 billion cash and would close on the transaction in the coming months. Back in September of 2013, TechCrunch reported that Twitter acquired MoPub for $350 million in stock. Certainly not a bad return, in fact greater, than the 150% return from the S&P500, although that ignores any subsequent money Twitter may have put into growing the business. The table below shows revenue figures from 2020 in millions of dollars:

Source: Twitter Annual Report

Therefore MoPub contributed 37% of Data & Licensing (D&L) revenue and only 5% of Twitter's total. The company will provide details on the financial impact of MoPub's sale next week, but at 5% of total revenue, it's not a huge loss. More important than the impact to revenue is what the sale says about Twitter's overall strategy.

What the MoPub Sale Confirms About Twitter's Business Strategy

The sub-header of the release stated that the MoPub "Divestiture will increase focus and accelerate development of owned and operated revenue products." More specifically, CFO Segal's comments focused on the potential for ads on Twitter, reminding investors of "our previously stated goal of at least doubling total annual revenue from $3.7 billion in 2020 to $7.5 billion or more in 2023." CEO Dorsey's statement was similar and stated that the sale demonstrated confidence in the company's core products and Twitter's long-term growth. In fact the press release gives us a pretty good idea of exactly how the cash from this sale will be used.

A Settled Lawsuit

When MoPub was acquired in 2013, Dick Costolo would have been TWTR's CEO, before Jack Dorsey took back over in 2015. I don't think the company made the decision to sell MoPub simply due to differences in vision between CEOs. It's more likely that TWTR wanted to boost its cash reserves by roughly $800 million in the near-term, and MoPub happened to be a separable segment of Twitter that exceeded that need.

The main body of the press release ends with the following statement: "the Company will record a charge to operations during the third quarter of 2021 for the $809.5 million litigation settlement it announced on September 20, 2021." Based on the timing, it looks like TWTR needed cash to cover the outcome of this lawsuit, and selling MoPub was deemed the best way to accomplish that. However, TWTR ended 2Q21 with over $4 billion in cash on hand plus another $4.5 billion in short term investments, so it's not like the lawsuit forced the company to make this move. Using the majority of the funds for a settlement payment, also does not invalidate the comments made by the three c-suite members in the press release. Instead, divesting MoPub, coupled with other actions and comments confirms that Twitter is gearing up investments that will require a significant amount of cash, and the lawsuit would have left management with less than they wanted.

Twitter's Strategy Might Be Experimentation

CEO Jack Dorsey's prepared remarks on conference calls aren't the longest, but they are perhaps some of the most candid. For example, in his 2Q21 prepared remarks Dorsey states: "Expect us to start and stop many more features than we have in the past." It's rare to have a CEO tell investors that his company is going to implement a bunch of features that will ultimately be killed off when they don't work. An example of that in action is Twitter's Fleets, essentially tweets that would expire within 24 hours, that borrowed the familiar "My Story" format from Snapchat. It's a format that's been replicated by Instagram and others with great success. The idea was to let people post without having to worry about making comments that could haunt them in the public domain forever. Fleets didn't have the desired affect and instead was adopted as a supplement to people that were already tweeting, similar to the way Instagram users use stories. Not surprising given that Fleets was essentially a clone of a feature on other platforms.

Twitter's users are loyal to the platform partially because it is so different from the other social media outlets, and I don't think copying features from other platforms is the way to make Twitter better. When asked by an analyst why Fleets was shut down, Dorsey responded that it wasn't doing the job it was designed for and "I'd rather spend the time on stuff that's going to be very unique to Twitter." Some new features like Super Followers, Spaces, and Tip Jar are still alive, and the subscription, Twitter Blue, is still being rolled out. We don't know what features Twitter will introduce going forward, but Dorsey did say the focus would be in three areas: AI, decentralization, and payments, specifically Bitcoin.

What Might Twitter Be Planning In Its Focus Areas?

According to Dorsey, three trends relevant to Twitter are AI, decentralization, and Bitcoin. I'm not sure he could have chosen bigger, more vague topics, but he did give a brief explanation of how each applies to Twitter.

Trend 1: Artificial Intelligence - A Clear Fit

In the 2Q21 conference call, Dorsey stated that, "With AI and machine learning, we increased relevance and discovery, a long-standing issue on Twitter which we're improving every day." AI is a huge field, and Dorsey probably could have limited his comments to machine learning, a subset of AI, based on his description, but maybe they've gone beyond that. One of Twitter's primary jobs is to bring the right content to the right users whether that's for the purpose of user engagement or advertising. By improving this function, Twitter makes the platform more useful to users and advertisers alike. So far, we've seen Twitter increase and get a lot more specific on the topics of interest you can select from. This provides Twitter additional data points that it can use to cater to its audience.

A challenge with machine learning is overfitting, where the model ends up matching the training data too well. In Twitter's case, this has the potential to create isolated bubbles within Twitter rather than the global community the company is depending on. It's a well-understood problem, but the really hard part for Twitter is that users are going to supply that real-world data almost unconsciously through their actions on Twitter. That might explain why this has been a "long-standing issue" for the company. Beyond the issues associated with machine learning, another SA article does a nice job discussing how Twitter's platform isn't ideal for ads, at least right now. Still, if Twitter can make progress in the areas of relevance and discovery, we should see corresponding improvements in user metrics and advertising value.

Trend 2: Decentralization - Abstract, but Understandable

Bluesky is a project, sponsored by Twitter to create or find a decentralized social network standard that the company can utilize along with other media sources. Dorsey announced the initiative on Twitter in December 2019, although it appears to be have become a higher priority with its first leader, Jay Graber, announced just a few months ago. Graber stated that her first priority was building a team, so it seems Bluesky is still in very early days. Just as a large, centralized government lends itself to a lot of inefficiencies, so do large companies, as anyone that's ever worked for a large corporation can tell you. A few issues that Twitter, and other social media platforms are struggling with at the moment are:

• Everyone wants Twitter to enforce policies THEIR way & Section 230
• Bots, fake identities, and click farms take advantage of algorithms
• Privacy, security, and data breeches

In some ways, it looks like Twitter is "passing the buck," and saying that it shouldn't be responsible for censoring elected officials or assessing the accuracy of what can be very complicated issues. However, I think most people agree that they don't want corporations involved in public policy, and Bluesky might get us part of the way there.

As far as investors are concerned, I can't point to any direct benefit decentralization would bring to Twitter's shareholders. In fact, by addressing privacy and security issues, advertising might become much more difficult on a decentralized network, where users no longer need to associate their login with credentials like an email address or phone number.

However, decentralized social networks like Mastodon, implementing the ActivityPub protocol, already exist, and while these have their own sets of pros and cons, they may become a threat to the likes of Twitter and Facebook in the future. If Twitter is thinking about getting ahead of the trend to be prepared for the competitors the future will bring, that puts shareholders in a better place than they would have been otherwise.

Trend 3: Bitcoin - Needs More Explanation

On the 2Q21 conference call, Dorsey specifically called out Bitcoin, although his comment about starting and stopping initiatives suggests to me that he's open to any form of purely digital, global currency as a form of payment on Twitter. Most of Twitter's users are international, so relying on USD might work, but it's not ideal.

Source: 2Q21 Twitter Shareholder Letter

As Twitter looks for new ways to increase the value of its platform it wants to making exchanging not only content, but money, as easy as possible. The tipping feature allows Bitcoin, but it also includes Venmo and other traditional payment providers. At this point Bitcoin may simply be a currency that allows for easier transactions in the unbanked portions of the world.

I didn't find Dorsey's Bitcoin explanation on the 2Q21 conference call all that compelling. "If the Internet has a native currency, a global currency, we are able to move so much faster with products such as Super Follows, commerce, subscription, Tip Jar, and we can reach every single person on the planet because of that instead of going down on market by market by market approach." The way I interpret this, Dorsey is saying that if Twitter only had to implement payment solutions for Bitcoin, they could implement those features a lot faster. Sure, but unless "every single person on the planet" agrees to use Bitcoin, or Twitter is willing to abandon the markets that use something else, the comment feels irrelevant. Even if everyone did agree to adopt Bitcoin, Twitter's competitors gain the same implementation speed advantages, so for me, Bitcoin providing any game changing value for Twitter falls flat.

TWTR Stock Valuation

I don't often insert a chart in a valuation section, but this textbook triangle pattern suggests that we could be in for more consolidation in the near-term with a breakout later this year, maybe early next year.

Source: Yahoo Finance

At first glance, it looks like Twitter knocked it out of the park with sales growth in the quarter:

Source: 2Q21 Twitter Shareholder Letter

As other SA contributors have pointed out, this was a very easy comparison, seen across all of ad-focused tech, but it does tell the more long-term story of TWTR's stable sales growth. In the years following Dick Costolo's tenure, Twitter's sales flattened out for about three years, but since then, with the exception of Covid, sales have been in a stable uptrend.

Source: Author created with data from Macrotrends

A few things stand out in the chart above:

1. Seasonally strong Q4 sales
2. Covid fears, which peaked in 2Q20, depressing sales
3. An upward trend despite temporary headwinds from Covid

The compound annual growth rate (CAGR) for revenue comes in around 19% of the time period above. That's a bit above the trendline, but given the impact of Covid, CAGR probably gives a more accurate picture of how Twitter has been able to grow sales on average during Dorsey's tenure.

In what's slowly becoming the aftermath of the pandemic, Twitter has some advertising tailwinds from an accelerated shift online. However, that trend is lifting all ad-focused tech stocks, so that alone isn't reason enough to own Twitter vs. a diversified portfolio that includes it along with peers. What might provide a compelling reason would be if Twitter can deliver on the goal Dorsey delivered during analyst day "to more than double our total annual revenue to over $7.5 billion in 2023." Earlier in those prepared remarks, Dorsey said the reason people don't believe in Twitter comes down to three things: "we’re slow, we’re not innovative, and we’re not trusted." Rather than refute these claims, Dorsey acknowledged the shortcomings and offered the following explanations.

The lack of innovation stems from slowness. Fair enough, if you have an idea you want to try, but implementation is slow, your resources are probably best spent speeding up your development cadence first. Improving speed is exactly what Twitter has devoted a significant amount of time and people to over the past several years. That effort appears to be paying off which is why we're seeing new features rolling out of Twitter. Not all, like Fleets, are going to work, but a nimble company can afford to experiment, learn from mistakes and improve. Finally, lack of trust is not a problem unique to Twitter, but Dorsey sounds committed to addressing that issue by increasing transparency through in-house changes, like better moderation of topics, but also through more abstract projects like Bluesky, discussed early.

This explanation, coupled with TWTR's 2Q21 sales figures and balance sheet, make me believe $7.5 billion in sales is possible. If TWTR can hit $7.5 billion, it might still not be profitable depending on the level of investments its making. A more mature ad-focused company like Facebook or Google currently converts about 30-50% of sales to EBITDA. If we assume Twitter can accomplish the same in the long run, using 30% to be more conservative, I'll use $2.25 billion as EBITDA, excluding investments, as an estimate for 2023. In this growth scenario, 30 might be a fair multiple to use on EBITDA, which would value TWTR around $67.5 billion in 2023. From the current $50 billion market cap, that's 35% upside, although a lot of things have to go right for that to happen, and Twitter has to exceed its historical performance. I think the market is pricing Twitter fairly at the moment because it should be worth more if everything goes right, but the current price includes a discount because success isn't assured.

Final Thoughts

If you have strong conviction in TWTR's ability to deliver on its goals, then I estimate there's about 35% upside to the current market price. That assumes Twitter can hit its sales goals and that 30 would be a fair multiple on EBITDA, which it might not. Twitter has a decent amount of cash to pursue investment, and the MoPub sale ensures the lawsuit won't consume too much of the current balance sheet. I'm not personally going to add Twitter to my portfolio because the risks to achieving its goals are substantial, and the chart implies a fairly large price move is coming. If the stock breaks the current triangle pattern to the downside, I might look to open a position.

I, The Stock Dudar, tend to write longer form articles to give the most complete picture I can. If you find that style appealing or the information I provide useful, please consider leaving a comment to let me know you appreciated the article.