Image Source: Xiaobin Liu
The social media platform known for its tweets faced selling pressure after reports surfaced that it had removed 70 million fake accounts from its website. Social media is still a relatively young technology, and our top idea in the space remains the cash-rich Facebook.
By Kris Rosemann
Shares of Twitter (TWTR) fell more than 5% during the trading session July 9, less severe than the drop had been at its session worst, following a report from The Washington Post outlining the company’s suspension of 70 million fake or spam accounts in the months of May and June. Twitter had 336 million monthly active users as of the end of the first quarter of 2018, but company officials have been adamant that most of the accounts removed had not been active on the platform for 30 days or more, or are caught at sign up, suggesting monthly active user growth data would not be impacted.
Nevertheless, the 5%+ drop in Twitter’s shares July 9 seems to have raised concerns about the quality of Twitter’s published monthly active user numbers, despite management’s reassurance to the contrary. It may be close to impossible to determine whether a meaningful percentage of accounts still in Twitter’s numbers are real or not. As programmers become more and more sophisticated in generating bots and accounts, many are growing worried that Twitter may not be as large as the published number suggest.
The most important sticking point from the Washington Post piece is the matter of how this will impact monthly active user growth for Twitter, a figure for which it has drawn material criticism as it has struggled mightily to keep pace with social media big brother Facebook (FB) in the recent past. Without evidence to the contrary, company officials are the most reputable source for information on whether or not the deleted or suspended accounts will impact its reported user growth in its upcoming quarterly report July 27. This may have important implications on how much companies are willing to spend if the number of Twitter users is much smaller than originally believed.
The questions regarding user growth are not solely tied to this recent round of removals either. Concerns about the direction in which Twitter takes the policy of suspending fake or spam accounts, which can also include those run by real people but act maliciously towards others, may have been flamed by Del Harvey, Twitter’s vice president for trust and safety, saying that the company is changing the way it is differentiating between promoting public discourse and preserving safety. Her comment that the company has only recently been able to dedicate the resources to such a task highlights the fragile nature of its profitability.
Twitter had previously stated that 5% of its active user base consists of fake accounts or engage in spam, and that less than 8.5% use automation software, characterizing them as “bots.” Though very difficult to prove, this may be harder for investors to believe after the news of 70 million accounts being removed in two months hit the wire. The number of users on Twitter’s platform that can be reached by company advertisements remain its key selling point and core revenue driver, so removing 70 million accounts is a rather big deal to its revenue model, even if strengthening its core user base may not be a bad thing, in itself.
Policing its user base does not come without cost for Twitter either. Not only can it potentially create disappointing and market-moving headlines for investors and the corresponding related share-price weakness–and any perceived “misstep” may very well be hyper-examined in the ultra-politicized environment in which we live–but the company must deal with the explicit costs of having to monitor actions by its user base. As Del Harvey noted, Twitter has only recently been able to dedicate resources and develop the technology to go after malicious behavior in such an aggressive manner, and those resources may have had a higher ROI if deployed elsewhere.
Whether or not Twitter’s more aggressive stance on fake and spam accounts will prove to be prudent will not likely play out for some time, but what matters is that it gives investors another reason for pause before considering the idea. Social media platforms carry unique risks as they are increasingly found at the center of human interaction (for the most part, anyway), and the responsibilities of the platforms are being sorted out in real time right before our eyes. It may be common knowledge, for example, that Twitter is a great way to spread news, but it unfortunately is an even easier and faster way for fake news to spread, too.
The additional risk in public and political pressures that may add to costs, but shut out new entrants as well, may be yet another reason why we prefer Facebook over Twitter in the social media space. Facebook’s fortress-like balance sheet ($44 billion in cash and no debt on the books at the end of the first quarter of 2018) provides it with tremendous flexibility, and while Twitter has been free cash flow positive for multiple years, it can’t hold a candle to the free cash flow generating capacity of Facebook. For comparison, Twitter turned in $670 million in free cash flow in 2017 (~27.4% of revenue), while Facebook reported nearly $17.5 billion in free cash flow in 2017 (~43% of revenue).
Facebook does carry many of the same risks as Twitter when it comes to managing its population of users, and as we witnessed with the Cambridge Analytica scandal, shares of Facebook are certainly not immune to public relations issues. Social media is still a relatively young technology, and there can be no guarantee as to what the landscape might look like five or ten years from now. However, we’re sticking with the platform that continues to turn in robust user and revenue growth and has impressive levels of profitability in addition to the cash flow and balance sheet characteristics listed above. That same platform recently registered a 10 on the Valuentum Buying Index! That’s Facebook!
Related: SNAP, SOCL
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Kris Rosemann does not own shares in any of the securities mentioned above. Some of the companies written about in this article may be included in Valuentum’s simulated newsletter portfolios. Contact Valuentum for more information about its editorial policies.