Stock of the week: Twitter

Summary:

• Twitter CEO was questioned by the Senate Intelligence Committee over “shadow banning”

• Monthly active user pool declined in the second quarter of 2018

• Company issued a weaker guidance for the remaining part of the year

• Twitter (TWTR.US) stock is approaching 200-session moving average

Twitter (TWTR.US) is one of the tech companies associated with social media platforms that has drawn increased attention as of late. Twitter executives were questioned by the US lawmakers over an alleged political discrimination on their platforms as well as foreign meddling into US elections. In this report we will provide details of what the case is about as well as take a look at the latest financial report of the company.

Donald Trump accused Twitter of “shadow banning” accounts of some Republicans in July. Source: Twitter

Twitter is facing accusations over alleged discrimination of some US political figures on its social media platform. The case was first brought up in the second half of July 2018 and attracted publicity once the US President Donald Trump said via (ironically) Twitter that the company is “shadow banning” prominent Republicans.

What is shadow banning? It’s a practice that involves limiting the reach of one’s posts or tweets so that no other people can see it. It’s called “shadow” as the ban does not prevent the victim from publishing on the social platforms but rather limits ability of audience to view this publications. Moreover, Twitter was accused of altering the search engine algorithm on the platform so it would not show accounts of some conservative politicians. The latter accusation was also raised in relation to Facebook and Google.

The interest in the case has increased this week as hearings were held by the Senate Intelligence Committee. Jack Dorsey, Twitter CEO, was one of the persons testifying yesterday. Dorsey denied charges of discriminating conservative politicians saying that the Twitter’s data analysis showed that both Republican and Democratic content is equally treated by the platform and no division based on political views is made among users by company’s systems. As example he pointed that #MAGA hashtag (Make America Great Again) is extremely popular on Twitter. However, Republicans gathered in Congress did not believe him and one of them asked why in such case upon creation of the new Twitter account a person was recommended a profile of prominent Democrat rather than for example Taylor Swift or Kim Kardashian.

While Twitter enjoyed nice pace of QoQ user growth in 2013 and 2014 the dynamics decelerated later on. The number of active monthly users holds firm above the 300 million mark since 2015. Source: Bloomberg, XTB Research

While the question whether Twitter as a company or Committee are politically motivated in their doings is not for us to answer we can take a look at the case from the business perspective. Given how popular Twitter is among Republicans and that the President of the United States surfaced from the Republican background, limiting presence of this political faction on the platform would be unjustified. As Donald Trump is one of the most important persons in the World right now, his presence on Twitter is more than good for the company. His habit of expressing emotional opinions as well as official statements via Twitter surely increased traffic on the platform. Having said that, banning members of GOP on Twitter would not only damage company’s PR but also directly affect its business in a negative way due to reduced amount of active user and visits to the website.

Apart from the discrimination charges, Jack Dorsey and Facebook Chief Operating Officer Sheryl Sandberg were questioned over foreign influences in the US elections via social media. However, in this case executives were asked about their opinion rather than explanation. Both Dorsey and Sandberg admitted that collaboration in the area is needed and that they exchange information with peer companies to prevent explicit political propaganda on social media platforms in the future. Executives pledged to work with government to set up new regulations that would make it harder to commit election frauds via social media.

After few years of continuous losses Twitter climbed above the break-even line in Q4 2017. Source: Bloomberg, XTB Research

The latest earnings report released by Twitter was not in any way unsual when we look at the face of it. The company showed a minor beat in terms of both revenue and EPS. The gross margin came in at 78.8%, way higher than market consensus provided by Bloomberg suggested (68.7%). EBITDA at 264.8 million USD was also higher than median estimate. However, the number of monthly active user declined a bit. While this could be viewed as a temporary setback (Twitter experienced such situation before), the guidance issued by company is weaker than previously. The company warned investors that the drop in monthly active user may extend over future periods. Moreover, Twitter recognized the impact of new data protection regulations introduced in the European Union recently and said it may negatively affect company’s business. On top of that, full year guidance for capital expenditures was raised quite significantly, from 375-450 million USD range to 450-500 million USD. In turn the company’s share price took the biggest one-day dive since 2014, erasing as much as 20% of Twitter’s valuation.

Twitter (TWTR.US) still has not recovered from a significant drop initiated by second quarter earnings release (orange circle on the chart above). The sell-off was halted at 78.6% retracement level of the upward impulse started early April. The latest candlestick suggests that the market participants were not delighted by the course of yesterday’s Jack Dorsey hearing. Source: xStation5