A Fundamental Analysis of Twitter
By Neil Tamhankar (edited by Eshan Gupta)
Disclaimer: none of this is financial advice. Investing in securities is risky and Invest Bright is not responsible for any losses.
You know Twitter – a large social media company that is one of the only major competitors to Meta. Elon Musk recently bought the whole company (the deal is expected to be complete in 3 to 6 months, at which point Musk will officially own the company). With so much publicity on this company right now, is Twitter a good buy? We can find out by performing a fundamental analysis on the company, which means looking at its financials and industry strength, among other factors.
Background
Twitter was founded in 2006 by Jack Dorsey. The company was made during the internet boom of the 2000s and has since become one of the few major social media companies. It has also been the center of controversy, like when they banned former president Donald Trump from using the platform due to misinformation. This controversy has helped fuel billionaire Elon Musk to buy Twitter as he advocates for free speech. Twitter’s main revenue stream is ad revenue – advertisers pay Twitter to market their ads to Twitter users. For example, Apple could pay Twitter to advertise the new iPhone to Twitter users. Twitter also earns money through data licensing, the process by which Twitter sells real time data on the company’s platform to data companies.
Twitter’s stock chart for the past 5 years
Ratios
Twitter is a massive social media company with a market capitalization of $35.22 billion. The company has an earnings per share of -0.28 which means that Twitter is losing 28 cents per share in their operations. Profitable companies have positive earnings per share, so the fact that Twitter’s is negative is definitely a red flag. Twitter has a price to earnings ratio of 339.97, which means that shareholders pay $339.97 for each dollar of earnings. Compared to the average PE ratio of the Internet-Software industry, 42, Twitter is incredibly expensive. This means that Twitter is grossly overvalued in comparison to the Internet-Software industry. PE ratios vary by company and industry, but the average PE ratio for the S&P 500 has ranged from 13 to 15, much lower than Twitter’s.
Financials
For analyzing the financials of Twitter, we are going to focus on 2 areas: the income statement and the balance sheet. There are other areas you can look at, like the cash flow statement, but the easiest way to see the financial health of a company is looking at key metrics in the income statement and balance sheet.
1. Income Statement
The most important parts of the income statement are total revenue, gross profit, and net income.
This table shows the total revenue that Twitter and its top competitor Meta earned every year for the past 4 years.
| Total Revenue | 2018 | 2019 | 2020 | 2021 |
|---|---|---|---|---|
| $3 B | $3.45 B | $3.71 B | $5.07 B | |
| Meta | $55.8 B | $70.69 B | $85.96 B | $117.92 B |
Twitter’s revenue has steadily grown, which is good, but Meta blew them out of the water year after year.
This table shows the gross profit that Twitter and Meta earned for the past four years.
| Gross Profit | 2018 | 2019 | 2020 | 2021 |
|---|---|---|---|---|
| $2.07 B | $2.32 B | $2.34 B | $3.27 B | |
| Meta | $46.48 B | $57.92 B | $69.27 B | $95.28 B |
Gross profit is found by subtracting the cost of revenue, or the cost of producing the good you are selling, from total revenue. Once again, Meta vastly earned more gross profit than Twitter. Contrary to its name, gross profit is not pure profit. For that, we will look at net income.
This table shows the net income that Twitter and Meta earned for the past four years.
| Net Income | 2018 | 2019 | 2020 | 2021 |
|---|---|---|---|---|
| $1.205 B | $1.465 B | -$1.315 B | -$221 M | |
| Meta | $22.11 B | $18.48 B | $29.14 B | $39.37 B |
Net income is where we see Twitter’s true profitability, and it doesn’t look good. Net income is calculated by subtracting selling, general, and administrative (SG&A) costs from gross profit. Unfortunately for Twitter, the company has been losing money for the past two years while Meta has continued to profit. This is a large downside for Twitter because if the company can’t profit, how will stockholders? However, there is an explanation. Twitter paid a settlement of $766 million in a lawsuit claiming the company misled investors. The payment cut deeply into Twitter’s profits. Because the loss decreased from 2020 to 2021, it’s reasonable to say that these losses were an anomaly, and that Twitter will soon be profitable again.
2. Balance Sheet
The balance sheet is a lot simpler than the income statement. The main things to focus on are net assets and net liabilities. Does Twitter owe more than it owns? Thankfully, no. In 2021, Twitter’s total assets were $14 billion, while total liabilities were $6.7 billion. The assets were made up of cash, machinery, and property. The liabilities consisted of wages, pensions, and general debt.
Porter’s 5 forces is a method of analyzing the strength of an industry. The stronger the industry, the stronger the stock. The 5 forces are threat of new entrants, threat of new substitutes, rivalry between firms, bargaining power of suppliers, and bargaining power of buyers. We will analyze these for the social media industry and specifically Twitter.
1. Threat of New Entrants
There is a fairly high threat of new entrants for this industry. There are low barriers to entry because of the low amounts of capital necessary to break into this industry. For example, anyone with coding knowledge can build a website from their home without spending a dime. However, it is unlikely that any random person will be able to create a platform that is competitive with Twitter, which brings us to the next force.
2. Threat of New Substitutes
There is a low threat of new substitutes in this industry. It would require a massive amount of marketing and expansion for a platform to become even remotely competitive with Twitter, which has a dominant position in the industry. While new firms cannot compete with Twitter, existing giants absolutely can.
3. Rivalry Among Firms
There is a high level of rivalry among firms. Twitter’s main competitors are Facebook (owned by Meta), Instagram (also owned by Meta), Snapchat, and TikTok. Together, these firms dominate the social media industry. These companies are in intense competition, with Meta commanding a large lead with the ownership of Instagram, Facebook, and WhatsApp.
4. Bargaining Power of Suppliers
The bargaining power of suppliers is high in this industry. There are 2 main suppliers: suppliers of technical equipment and actual users who tweet and generate revenue for the company. There aren’t many suppliers of technical equipment, so it would be hard for Twitter to switch suppliers, increasing their bargaining power. Twitter also has pretty much no control over its users, which means that the users have a high bargaining power over Twitter.
5. Bargaining Power of Buyers
The bargaining power of buyers is high in this industry. The users are also buyers, and as we established earlier, Twitter has little control over them. Twitter also relies on advertisers for revenue, who have a high bargaining power over Twitter because they have many platforms that they can choose to advertise on. If Twitter raised advertising prices, advertisers could switch to Facebook or any other site with low costs.
This was a lot of information, so take some time to let it sink in. Analyze it and decide what the best option is for you based on this research. If you want to go deeper into analyzing the stock, try and connect everything we researched in this article to how it might affect Twitter’s future. Unfortunately, it’s impossible to predict if the stock will go up or down, so all we can do is make an educated guess on where the stock will land, based on this analysis. Lastly, be aware of news about Twitter, such as how Elon Musk’s acquisition of Twitter progresses over the next few months.
