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Twitter: Essential and Moderately Lucrative

Justin Fox is a Bloomberg View columnist. He was the editorial director of Harvard Business Review and wrote for Time, Fortune and American Banker. He is the author of “The Myth of the Rational Market.”
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On the Saturday after the Friday when Donald Trump's icky, sexual-assaulty chat with Billy Bush was revealed to the world, venture capitalist Fred Wilson had this to say:

Fred Wilson @fredwilson
Last night was Twitter at its finest. Anyone who says it is past its prime, irrelevant, and failing is out of their mind.
Twitter: Fred Wilson on Twitter

Wilson's Union Square Ventures led the seed round that helped get Twitter up and running nine years ago, so yes, he's biased. But he's surely right that in this presidential election, and especially the past few news-overloaded weeks, Twitter has been the hub -- the place where information is shared first and dissected best. Yes, it's also home to lots of nonsense and way too much vicious abuse. But for me and millions of others around the world, it has been pretty danged addictive lately.

So why is it that Twitter is perceived as such a disappointment -- a company with shares that sell for about a quarter of their peak 2013 price, and that a series of possible buyers recently looked over and decided to pass on? Well, mainly because of this:

Twitter's User Growth Stalls
Monthly active users
 
Source: Bloomberg

The number of active Twitter users pretty much stopped growing in early 2015. That hasn't been the case at already-much-bigger Facebook. Maybe the audience for rapid-fire news is just inherently smaller than the audience for, well, connection.  

Losing Ground to Facebook
Twitter monthly active users as share of Facebook MAUs
 
Source: Bloomberg

Clearly, Twitter is no longer much of a growth company -- and in Silicon Valley, that's totally not cool. But neither is it some kind of ephemeral or imminently failing enterprise. It's a corporation with $2.5 billion in revenue over the past four quarters, and seemingly steady revenue growth.

Twitter's Top Line Is Still Growing
Revenue, trailing 12 months
 
Source: Bloomberg

Yes, it still reported an $86.4 million loss in the last quarter. But the losses have been shrinking, and free cash flow (operating cash flow minus capital expenditures) has turned positive.

The Bottom Line Is Improving
Twitter net income and free cash flow, trailing 12 months
 
Source: Bloomberg

Twitter clearly has a future as a going concern. And really, why shouldn't it? It's a hugely popular media company with almost all of its content provided free by users! It also, as is apparent in the above chart, embarked on a spending spree in mid-2013 in hopes of accelerating growth, and that hasn't really paid off. 

So what should Twitter do? Well, maybe stop spending so much. That's already happening to some extent, as indicated by free cash flow turning positive. The main contributor to the gap between free cash flow and net income is stock-based compensation for employees, which shows up as an expense in the net income calculation but doesn't count against free cash flow.

Hedge fund manager John Hempton looks at all this, and concludes that the obvious solution is to stop reaching for growth and make big cuts in spending and head count -- a job best suited to a Wall Streeter "armed with a lot of debt." Once said Wall Streeter brings Twitter to reliable profitability, he or she could then presumably sell it to one of the strategic buyers who sniffed around over the past few weeks and decided to pass.

Twitter Chief Executive Officer Jack Dorsey, meanwhile, wants to keep the the company independent and offers this up as a plan (from a memo to employees obtained Monday by Bloomberg News):

We're only limited by our sense of urgency. Life is short. Every day matters. And the people who use Twitter every day deserve our best. They are why we're here. So let's show them what we're made of and deliver a better Twitter faster than they thought possible.

Of those two, I'm afraid Hempton's plan sounds more realistic. Twitter is a phenomenon. It's also a business -- just not a phenomenal, ever-growing one.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author of this story:
Justin Fox at justinfox@bloomberg.net

To contact the editor responsible for this story:
Stacey Shick at sshick@bloomberg.net