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Given Twitter’s current valuation, the market is building in extremely high expectations of the company’s future growth. Here are a few quick reasons why Twitter might not grow at the trajectory that the market is currently expecting.
The Internet is fickle
Twitter has a leading position in social media right now, but this doesn’t mean that the company will retain this position indefinitely. The Internet can be fickle, as demonstrated by MySpace, Yahoo!, Friendster, and AOL. These names all had strong or dominant positions in their respective spaces at one point. However, in today’s Internet age, Facebook and Twitter have trumped MySpace and Friendster. Google is used far more than Yahoo!, and AOL has transformed from a leading Internet Service Provider to a moderately sized online content company. Facebook currently has the leading position in social media, but some observers have already commented that the platform is losing share to other companies such as Twitter, WhatsApp, and Snapchat among younger users. Twitter could just as easily suffer from a fickle userbase in an environment where many platforms are competing for users’ attention.
Competition for advertising budgets
Twitter’s primary source of revenue right now is ad dollars. However, if the social media landscape becomes more crowded with new entrants or if other platforms (like Facebook) are viewed as superior advertising vehicles, Twitter could see its revenue stream grow at rates slower than those the market is building into its valuation.
Twitter has a great deal of levers it can pull to enhance revenue and margins (as we discussed in the prior section of this series). However, it’s up to management to execute the company’s growth plan effectively. Given where Twitter is trading right now, the market is surely building in a large premium due to the company’s potential growth. But this growth isn’t a sure thing, and it depends on the company’s ability to actually realize higher revenues and earnings. Plus, Twitter is still a relatively new company with a short operating history, which inherently presents more risk. For other online media stocks, see Better-priced alternatives to Twitter for your portfolio.
© 2013 Market Realist, Inc.