Chit Chat Stocks - Twitter (TWTR) | Not So Deep Dive

Episode Date: December 21, 2021

Twitter is a social media platform focused on "microblogging". The company makes money through advertising and data licensing. Listen closely as Ian, Brett, and Ryan go through the history, financials, and future prospects of Twitter. Enjoy the show! Our Tuesday Not So Deep Dives are sponsored by Potential Multibaggers. Multis are looking for stocks that have the potential to go up 10x in 10 years. Check-out the service here: https://seekingalpha.com/checkout?service_id=mp_1308 Want updates on future shows and projects? Follow us on Twitter: https://twitter.com/chitchatmoney Special promotion through the end of 2021: Subscribe to 7investing with the code "chitchat" and get $50 off your annual subscription: https://7investing.com/subscribe/ Interested in more of Ian's work? Follow him on Twitter: https://twitter.com/IanGrayLive  Rather watch us on video? Subscribe to our YouTube channel: https://www.youtube.com/channel/UCG5Ni-SI-jyrEsoNUhqftNQ Contact us: [e-mail] Timestamps Company Background | (2:29) Industry | (8:12) Management & Ownership | (10:05) Valuation | (13:57) Earnings | (16:51) Balance Sheet | (19:06) Our Analysis | (22:06) Disclosure: Chit Chat Money hosts and guests are not financial advisors, and nothing they say on this show is formal advice or a recommendation. Brett Schafer and Ryan Henderson are general partners and portfolio managers at Arch Capital. Arch Capital and its partners may hold securities discussed on this show. Learn more about your ad choices. Visit megaphone.fm/adchoices Learn more about your ad choices. Visit megaphone.fm/adchoices

Welcome to Chit Chat Money. On this show, hosts Ryan Henderson and Brett Schaefer interview industry experts and riff on the world of investing. As a quick reminder, Chit Chat Money is a CCM Media Group podcast. Ryan and Brett are also general partners at Arch Capital, and Arch Capital may have positions in the securities discussed in this podcast. Anything discussed on Chit Chat Money by Ryan or Brett or any other podcast guests is not formal advice or a recommendation. Now, please enjoy this episode. Welcome in. This is the Tuesday Not-So-Deep-Dive episode on Chitchat Money. This is the show where we go over for about 30 to 45 minutes, going over an individual stock, go over the history of the

company, what they do, basic financials, and then give out some opinions, future growth opportunities, highlights and lowlights on the business but first uh ian you're joining us today and we're talking twitter whose choice is this was this my choice yours yours and we're doing the poll to end it ryan do you have that i do i have the results and that's the result i wanted it is it was a tight race for the one uh to go on in two weeks or actually we got winter breaks maybe three four weeks but yeah in um twitter we're talking today have you obviously you've heard of it but have you ever owned the stock in the past? I have never owned the stock in the past. I've considered it a few times, but never pulled the trigger. All right. And I think we're in the same

camp there. I feel like it's on every single person's watch list and they never pull the trigger, but we're going to go into why maybe that is. But first let's talk about our sponsor for the Tuesday episode, Potential Multibaggers. The aim of the Potential Multibaggers service is to find stocks that can go up 10X over the next 10 years or compound at 26% per year. You've heard us talk about the service before, but let's talk about something where, you know, you may not, there's other parts of the community besides just the research reports. There's a chat community where you can ask questions to Chris, who runs the service directly and other, the multis.

That's how the members call themselves. And you can share your doubts, successes, what you're thinking about a stock. Everyone is talking together to hopefully get, you know, if you're confused on something or you have an opinion you saw in your news report that may be under the radar, all that good stuff. And that goes along with all the research reports you're doing. so if you want to become a multi you can go to seeking alpha and look for from growth to value google it or go to at from value on twitter ryan do you want to talk twitter yeah and this is

usually the part of the show where we explain what they do and so i think most people know generally what they do so i'll do that i'll talk about that briefly but then i want to talk about how they actually make money like what their revenue streams are because that might be a little more complex. But I guess if you don't know anything about Twitter, it's one of the most popular social media platforms in the world. Users communicate through short messages known as tweets. And the platform is particularly well known for how passionate the users are. They're often referred to as power users. Aaron Edelheit, who's been on the show before, he described Twitter as the most powerful news and curation tool in the world. And according to a 2019 study,

Twitter's users are on average wealthier and more educated than other social media sites. Wow. So we're all three of us are users. So that's great news, guys. We are wealthy and well-educated. I think some user probably made that up. Yeah, definitely. But they make money currently in pretty much two ways. So it's advertising and data licensing. And there's kind of four ways, maybe you could call it five, that people can advertise on Twitter. So there's one, This one is promoted ads. This is probably something people know about because if you've ever gotten a really random tweet on your timeline and said like, why the hell did that just show up

on my Twitter? That was probably a promoted tweet. And so basically this is just a regular tweet. The advertisers can pay to have shared to a broader group. And sometimes the most random tweets will get promoted, but sometimes it's also businesses trying to, I don't know, promote whatever their product or the message is. And then the second one is follower ads. So this is where Twitter recommends your account for people to follow based on their interests. So sometimes you're scrolling, you could see like, oh, recommended accounts to follow. One of them will be promoted. So you can kind of get in there that way and grow your followers. The third one is trend takeovers. This one is less known, but it puts an ad next to the

trending topics on Twitter. So some people use that as sort of their news curation. And so you can kind of have just an ad right there. That one's way more expensive than the other ones. It's like one ad placement is really expensive. And then the fourth is Twitter Amplify. So for this one, if there's a video that's gone viral, advertisers can pay to have a pre-roll advertisement in that video. There are some other ways to advertise, like there's a new live feature, but those are the basic ways that they make money. And I think 85 to 90% of the revenue comes from advertising. And then the other way is data licensing. So this is basically Twitter selling subscriptions to companies or developers for public data. So platform trends, stuff like

that. This is basically them just selling their data. And that's a pretty easy model, pretty simple, but it's only around... Last quarter, it was only 11% of revenue. But I'll get into the history. Twitter's got an interesting backstory. I know, Brett, I think you've read the book. Hatching Twitter, yeah. They have the egg thing as part of their old culture, I guess, back in the day. I have not read it. Yeah, it's a good book. I don't think it'll make you bullish on management. I'm just going to say that. Or at least the management that was there in the past. I guess most of them are gone now. All right. Well, I've got some, I guess I'll give a little bit of a rundown of the history from some founder interviews that I read, but Noah Glass, yes, the current CEO of Olo,

if you're familiar with him, came up with this idea for a web-based directory for RSS audio, otherwise known as podcasts. And the company was called Odeo. It was based in San Francisco. And like, it was basically the ordinary founding story in Silicon Valley, where you got an idea, you get a little bit of investor capital, you hire a few employees. One of those employees was Jack Dorsey. However, shortly after the founding, Apple came out with their own product, basically killing Odeo. So now they had this like small team of employees and they had a little bit of investor capital. So they're like, let's pivot, try to come up with something. So they had a few hackathons. And one of the ideas that came up was Dorsey's idea for basically a platform where you

could express your current status to a bunch of your friends. And Noah Glass kind of liked that idea. And they came up with the name Twitter, Twitter without any vowels, T-W-T-T-R. Yeah, big red flag. But anyway, they eventually changed the name to actual Twitter. And unfortunately, Glass was eventually pushed out by Williams, who was one of the co-founders kind of of Odeo. And the way that it worked was for Odeo, they had a whole bunch of investor capital, because it was designed for that podcast project, but the investors didn't really want to back Twitter. So they basically ended up selling their shares to Evan Williams, who was one of the other founders. So he consolidated power that way, fired Glass, hired Dorsey as CEO. But according to

some articles, Dorsey had other outside hobbies like drawing, cooking, yoga, and partying. And that began to take up too much of his time. So the board fired him. He was eventually brought back after he founded Square. So he founded Square in that meantime. And then he basically ran the two businesses for the last decade. Five years, five years. Is it five years? Yeah. He didn't come back to Twitter CEO until 2015 or 2016, I believe. Interesting. Okay. Well, anyway, now, I guess, what is it? A month ago now, he resigned and stepping into his place was the CTO or the former CTO, Parag Agrawal. That's the basics of the business. Maybe that was a little too

much history, but kind of that's where we are now. Yeah, no, that's a good overview. I'll hit industry and competition. Very simple for this one. Everyone really knows that industry is digital advertising estimated to be about $356 billion in spend in 2020. That's going to grow to $460 billion by 2024. As I think most people know by now, the majority of that is Facebook properties and Google properties, but there are smaller ones like Twitter, Snap, Pinterest that kind of get a smaller amount. We'll go over the earnings to show how really Twitter is only a small amount of the spend right now. A lot of estimates will have different numbers and projections, but it really, I think the big takeaway when looking at digital advertising

is that it is a large and growing market opportunity. Besides that, when you're doing industry research, I think that's kind of the takeaway you want to come up with, or at least that's a good one if you're kind of looking at an industry. But overall, Twitter has a very unique industry and competitive landscape. It isn't so much competing with others a lot of the time because it's already captured a ton of time spent from its users, but it's really competing with itself to improve its monetization tools. I'm sure we're going to talk about that in the back half with the highlights and lowlights and future growth opportunities, stuff like that. Competitors, you'd probably say Facebook is a big competitor

because they do a lot of news snap instagram tiktok maybe a little bit but not so much because they're not really news as much as they are social and twitter's more more news i guess uh clubhouse is i guess more of a competitor now it's a lot smaller roblox is a competitor maybe for younger people but still not a big one substack is probably a big competitor essentially anywhere you are finding and reading things on the internet or watching things on the internet those are competitors. Maybe even Apple news, Apple news. Yeah. I'm not sure how popular that is. Um, I think it's pretty popular, but yeah, I don't, I don't know. I just, when I think of like user experience, that's kind of what I go generally there for, but anyway, we'll, we'll get into

that. Yeah. All right. Ian, do you want to hit management and ownership? Yep. This is going to be a little bit of a longer section due to the recent management change. But as Ryan was mentioning Prague Agrawal is the new CEO. He was recently made CEO in a memo that then Jack tweeted out. A couple of details on that. Dorsey is staying on the board through May, which is the rest of his term, and then stepping down. And he said that he had been thinking that Prague would succeed him for about the last year. One of the things that was interesting in Jack's memo is he sort of took some shots at the idea of founder-led being an important thing in companies, and especially in mature companies and was trying to kind of refute some of that

idea. And so unlike, um, uh, some of the other transitions we've seen recently, most notably Bezos, uh, transitioning out of the Amazon, uh, CEO role and moving to executive chairman Dorsey just totally is leaving the company basically after, after may, um, it's hard to argue that Dorsey has been nearly as successful as Bezos as a public company CEO. And so maybe it makes some sense, but it is interesting. I think, and kind of a shift from what we've seen in the recent past of kind of that move from CEO

to executive chairman, that he's just completely leaving and obviously has a lot going on at Square that's going to be taking up his time, presumably. A little bit more about Agrawal. He's been at Twitter for 10 years. He was first hired as a software engineer and was instrumental in building Twitter's ad platform. But more recently, he became CTO in 2017 and has served in that role since then. Not a whole lot is known about Parag or his intentions about the future, but there are some indications that he's a little bit more prone to censorship than Dorsey was. He made some comments in an interview back in the spring that kind of seemed to lean a little bit more that way. And he's been focused on machine learning and AI components of Twitter

during his time as CTO. As far as ownership goes, Dorsey currently owns about 2% of the shares outstanding. It's unclear exactly what he's going to do with those shares once he leaves the company. Parag owns very little stock, only about $12 million in current market value. But we do have info on his comp package going forward. And it doesn't seem ridiculous to me. He's going to be making about $1 million in salary with a possible $2.5 million performance bonus each year. And then they're giving him $12.5 million in restricted stock units, which are going to go into vest over 16 quarterly increments. So a little bit over $3 million vesting each year. I think that investors should probably expect that the number of RSUs,

restricted stock units, are going to keep rising over the next few years. If he's successful in the short term, that they'll give him some more packages and try and get that. I would assume like some of the other CEOs that have taken over for founders, like Microsoft or Google, that they're going to try and give him a lot of stock over the next couple of years to get his ownership stake up as long as he's successful. It was a little bit surprising to me, actually, they only had 12 and a half million in RSUs initially. But anyways, that's the keys on his compensation. And then just a little bit on institutional ownership. Vanguard is the largest holder with about 9% of shares outstanding. Institutions own about 80% of shares. So it's

definitely a known entity with significant coverage. And so there's not... Twitter is definitely not sneaking up on anybody. Everybody knows Twitter. It's very well known in the investment community. But this new transition is definitely a big deal for the company as well. Yeah. That's interesting on the pay stuff. Relatively to the size of the company and maybe the size of other ownership stakes, $12 million doesn't seem like a lot. But I think if I was running a company and $12 million of my dollars was tied to its success, I think I'd still be pretty incentivized to do well. But they're definitely going to give them more. For sure. For sure.

Yeah. Valuation. This is an easy one, I guess, too. Market cap's $35 billion right now. Tigger is TWTR. Enterprise value is actually closer to $33 billion. They have a lot of cash, but also a good amount of debt too. It balances out. They have a positive net cash position. I'm sure Ian's going to talk about more of the details on that. EV to sales is 6.8. One of the lowest it's been in its history. They're actually at 72 times sales at the IPO. If you read the history of the company, I believe it goes up to that time when they IPO it was right around the time at Facebook. I think they were really trying to compete with Facebook back then. And obviously Facebook really crushed them, but Twitter had no, like, they didn't even try to build up an

advertising thing until then, like they went public and they're like, all right, guys, it'll be easy. Let's build ads. And as people probably expect, it was a lot harder than, uh, you know, you'd think. What did Zuckerberg call Twitter? The clown car that fell into the gold mine. I think there's a lot of evidence that that might be true, although Zuckerberg's being mean there. EV to gross profit is about 11. So high margins, as you might expect for that ad business. If anyone knows Facebook or Google, you know this is high margin business. EV to free cash flow of 101. They actually have a pretty sizable capex spend. They do not outsource a lot of their stuff to the cloud infrastructure players

like Google, Amazon, or Microsoft. So they do a ton of that in-house. So they do have sizable CapEx, but their free cashflow margins are probably, they probably could expand rather quickly if they scale up. I don't know.

There's a lot of operating leverage there in the margins. So even a free cashflow of 101 isn't saying that this is the most absurdly valued company out there. I'd really look at that in relation to the gross profit multiple and the sales multiple as well.

Or operating cashflow. operating gab but just they're going to be capital intensive though because of that that keep everything in house yeah i just don't know how much of that i guess this was something i was kind of looking at too and it shocked me how much they spend on capex um or property plant equipment and i'm curious how much of that is maintenance versus and it is going to be recurring versus uh like a heavy upfront cost now hard to tell it seems like twitter if anything you should always lean towards them spending more money because they love to spend it um last thing i note here 147 million dilutive securities this includes warrants the convertible notes stock

options and rsus and that is versus 798 million shares outstanding so i expect a share account headwind i mean for sure but they have started to buy back stock to neutralize this if you look at their share count chart it's gone up at a decreasing rate which sounds like decent but That's because they bought back stock. So even while they're buying back stock, their share count is still going up. That's tough. There's just a lot of embedded dilution here. But Ryan, do you want to kick it off into earnings? Yeah. And I'll give a few of the trailing 12-month numbers for a bit more of a holistic view, but then I'll get into the recent Q3. So the last 12-month revenue is $4.8 billion.

That's up about 40% year over year. And then last 12-month gross margin has been 64%. They've generated about just under $1.5 billion in operating cash flow, which puts their operating cash flow margin at 31%. But as I said, they spend a surprisingly high amount on property and equipment. So free cash flow margin over the last 12 months has been about 7%. Ideally, if you're a shareholder, you definitely want to see free cash flow margins begin to converge with operating cash flow. Yeah. Especially with the amount they do SBC, you should really expect that to grow pretty quickly. And then in the last quarter, so the third quarter, they had revenue growth of 37% year

over year, and their average monetizable daily active users were 211 million, and that's up 13% year over year. And then they had a $743 million operating loss in the quarter due to a big one-time litigation settlement. It was a shareholder lawsuit alleging that in 2014, Twitter misled investors about how much its user base was growing. um and so they recognized that this quarter um and i think they recognized all of it um i think so too yeah so that that i that hopefully that shouldn't be that should be a non-recurring

charge and i would just focus on cash flow uh moving forward uh wouldn't worry too much about that i don't think they have any other outstanding lawsuits yeah no they probably do their twitter they probably do but maybe some a lot of them probably don't have much maybe not shareholder lawsuits. True. Yeah. But still, that's still like, I saw that it was like $750 million. I mean, it's never great. Okay. I mean, I'm not drawing a comparison, but I'm reading that Enron book, and there was that one quarter where they're like, let's just lump all the non-recurring charges into this one quarter. Maybe analysts will forget about it. This kind of feels like that, even though it's probably just that one litigation. So yeah, it's a big thing in companies

in general. If you see the non-recurring stuff, you have to really like track over time, how much are they doing non-recurring charges every year? So a lot of companies tend to do that, but let's hit balance sheet and liquidity. Ian, what do you have for us? Yep. Twitter has about $7.4 billion in cash, about $5.5 billion in debt, and that's broken up into a few different debt offerings and leases. So in total, they've got about $3.6 billion in convertible debt. About a third of that is 0% interest 2026 convertibles, where the conversion price is $130 a share. So about a three X from here, basically for anybody who doesn't know what a convertible is, it's a debt instrument. In this case, it's zero coupon debt instrument that if the

share price goes over the conversion price, investors can trade their bonds for shares of the stock. And so in this case, if Twitter was to go over $130 a share, investors could swap out their debt for Twitter shares. Like I said, that's about a 3x from here, but it's also 2026. So they've got some time to get there. They've also got about a third of it in a quarter percent 2024 convertible bonds that have a $57 conversion price, $57.14. So much closer to the current share price. And then they've got about a third of it in 2025 convertible bonds that are 0.375% interest. And so again, low interest, but then an even lower conversion price at $4,150 per share. They've also got $700 million in 2027 senior notes. And so those pay 3.875% interest,

but those are not convertible. Those are just purely debt instruments. And then the rest, the remaining about a billion dollars is in leases. And so quite a bit of debt, but nothing, Most of it's fairly low interest convertible debt, which depending on how you feel about that, that's the state of their balance sheet. I mean, in a world where interest rates start increasing again, Twitter did it right. They got a whole bunch of cheap debt. Yeah. But the thing is, why aren't they buying? You have the cash on the balance sheet, though.

So if you're going to have the convertible, the whole point is to leverage your stock price. That is lower now, and hopefully it'll be higher in the future. Why aren't you buying back all your stock now? So if you have that debt that's at a way higher strike price, what's the point? Why not just do standard debt if that's the case? I would much rather have them buy back stock using this or just take out standard debt because that dilution is just going to be killer if you get up there. Yeah, I think the dilution could be killer for sure, especially on those 2024 and 2025

notes. I think for the ones that the 2026 notes look genius right now, 0% interest, conversion price of $130 a share. They've got a lot of, they basically get free money for five years and then see what happens from there. Yeah. I would hope they accelerate the buyback program or else it's a bit confusing on what they're doing. But yeah, no, that was a good overview. Let's hit the ad break and we'll get back to more analysis on Twitter. Whether it's building the skills individuals and teams need to tackle mission-critical projects, driving cloud transformation, or helping software teams to ship reliable, scalable, and secure code.

Harness the collective power of hindsight, foresight, and insight with Pluralsight at pluralsight.com slash vision. This episode is brought to you by KPMG. As a business leader, how can you innovate, build trust, and move forward in a digital era? KPMG can help by bringing together the right talent and technologies, generating insights that spark opportunities. To explore their thinking, visit reed.kpmg.us slash opportunities. Okay, welcome back. Next up, we have anecdotal evidence.

Ryan, it looks like you wrote a question here. What do you use Twitter for the most? So I'm going to ask that to everyone. Ian, what's your anecdotal evidence and what do you use Twitter for? i'd say it it changes between i'll use it during the day for stock market stuff and then once uh once the evening comes around i'll be flipping through it for phoenix sun's commentary and get on uh nba twitter for a little while but that's your burner account uh yeah exactly my burner account you know kd 25 26 39 is is my burger so if anybody wants to find it that's that's it

I, uh, yeah, I'm getting into sports Twitter a little bit myself too. There's some, there's some good comedy in there. I would say I use Twitter mostly for news plus new investment ideas. I, I, I think Brett and I, you would kind of use it in a similar way where I like a lot of tweets that are just articles so I can read them later. So I can just save and read stuff. Um, it's and i can honestly it's like my daily dashboard as sad as that is to admit but i i usually i start my day there and sometimes i end my day there um it just kind of feels like it keeps me in the loop yeah i actually blocked it on my uh browser so i have to like go through a process to unlock it if i'm trying to post something on like some ccm thing or you're

linking something over there i have to go through and block it when i'm writing or something you know, I have to force myself not to get on it. That's a testament to how good the product is sometimes. But yeah, I'm similar at finding things to read, current market news, and then researching a company. I mean, that's more in the investment perspective, the best thing. If it's a little known company, you'd search the ticker symbol. You might find some articles that someone wrote, someone that knows it well, you can DM them. It's great in that regard. But the negative though, is from our chitchat money account perspective, it is a lot more limited than I think it should be for kind of in that regard. We're trying to build it as more

a professional account and we, you know, we can't sell anything on there. We're like, I feel like you should be able to listen to a podcast through that account or at least make it really easy to know like what we are. All we can do is link to some Spotify or iTunes link that people can barely see. The newsletter products should be embedded in there, right? Like why they're losing so much of that to Substack when they have the newsletter and everyone's kind of finding these newsletters through twitter i don't know that review product like anecdotally it's really limited for professional the professional stuff that people are trying to do that's why i call it sort of my daily dashboard is like it's i start there but then it's just links to other places yeah you

branch out to other areas i know and they've been saying they're trying to bring that more in house for years and years and years and i feel like they keep failing uh but we'll talk about that more probably in highly similar ways. Future growth opportunities. I think this one will be easy for everyone. Everyone has an opinion on what they should do. But Ian, what do you think? This is kind of a boring one, but I think that the biggest future growth opportunity for them is improving their ad platform. Out of all the social media ads I get, I have to say that Twitters are typically the least relevant and the worst. I rarely see things that are applicable to me. Sometimes it's even comical. I think that it's kind of funny because I think the same AI

technology that's showing the trends you know how it'll say like sports and then have a tweet beneath it um is probably the thing uh that's used for ads as well like a similar algorithm is used for ads and it's always it always makes me laugh when i see something on there that's like now trending in sports you know the science of hitting tweeted i'm looking for singles doubles triples and home runs or something like that i don't know if alex tweeted that but alex yeah he did not he did not tweet that specific thing that's a made-up example but i hope i hope the algo you know boosts him for Or put him in the sports category and people find him and just random sports fans start following him. Yeah, exactly.

What is this? Return on invested capital? Exactly. But I think their ad platform just has a lot of room for improvement. Yeah. Yeah. I think everyone can agree on that. Ryan, what's yours? I mean, here's kind of the funny part is there's so many Twitter users that are trying to come up with new business models for Twitter. Like they're like, oh, you could try this. You could try this. It's like a user-generated business model. And they never do anything.

Yeah. I mean, they've been trying stuff. Well, recently. Okay. But I think the super follows was a complete flop. Two thumbs down. I didn't understand who was super following who. And anyway, the opportunity, the growth opportunity that I think I would pay for as a user is a news bundle.

So I know Apple News tried to do this, but if Twitter were somehow able to do sort of a discounted bundle of different news services, so like Wall Street Journal plus the Financial Times or Stratechery or something like that, I would pay for that, especially since I find a lot of the articles through there anyway. So if there's a really popular Wall Street Journal article, I'm probably finding it on Twitter. So if they could give me a discounted one for all those, I would pay a monthly rate and then maybe they just get a take rate on it. I don't know. There's a ton of different ways they could monetize their users. I think you've got to make them actually pay for something and not have it just be ads. Yeah. And either putting it the other way, that comes back to the Substack really taking all the money from basically a lot of the newsletter writers are acquiring subscribers through Twitter. It's not just there, but it's a lot of them are from there. And Twitter makes no money off of that. So why didn't they? I don't understand how they can't just copy Substack. It's a very basic product. I don't know. I think they're leaving a lot of money on the table there. What exactly was Revu? it's about it's a it's a similar thing to substack but it's just way worse it's just so much worse

like uh at least from people that i've tried to use it they say that it's just not as workable as substack and you know i feel like it shouldn't be that hard to replicate substack maybe i'm over underestimating how hard it is but that seems like a very simple you know product to build uh but who knows? Uh, I don't know. All right. Uh, for mine, like I said, there's a lot of things, but one thing they're trying that I think seems promising is shopping. Maybe, um, it allows people to plug stuff into their profiles. It's kind of similar to what people have on YouTube.

Now you've probably seen that a bunch of people's videos. Uh, they link those down there. I think it's going to look similar to that. I think one problem is no one knows it exists. I didn't know it exists until I read the shareholder letter. Um, And two, they aren't just doing the Shopify, Wix, Amazon plugins, as most companies do that are trying to attract these e-commerce things. I think Instagram does that basically where you just plug it in, or at least you have the option to plug it in from your existing e-commerce store.

Spotify does that. Google has got invested heavily into that now, but they are, that would have been simple if they just did that route, but, and it would have been so easy to scale to all the users because everyone know how it goes. you just make it super easy, but they've decided to go this complicated route. I had trouble understanding their blog posts, talking about it, which makes it feel similar to a lot of their other, other products like Twitter blue that they just launched. I have no idea what that is. They could be good products, but they just seem to can't explain it to people.

It's like, they're all in beta. Like they, they don't want to be, they don't want everyone to know what it is too soon in case it's not like a good product. It's weird. I think the shopping thing is promising though um i don't know what do you guys think about that one possibly i don't that's not really my use case though like i'm never on the but it could i mean people potentially but i don't think it has like as many inroads to like shopping as say like a pinterest or an instagram yeah but they but the people are relating to these accounts so much i feel like there's the opportunity for people that are spending all day talking with these people to do that. Possibly. Ian, what do you think? Yeah, I was just going to say, I think that,

and this will kind of get into my highlights and lowlights, so maybe I can move into that too. But I think that Twitter's niche is really more of the creator economy, not as much on the shopping side. And so like Ryan was saying, with Instagram or Pinterest being really good at having visuals to get you interested in buying a particular product, I think that where Twitter benefits is from you know finding content not necessarily finding products and so um that the more they lean into that and trying to get more into selling subscriptions to certain people or like super follows didn't doesn't seem to have worked but i think that's that's more the route that makes sense from the twitter use case than um than shopping necessarily but i don't know it's it's

tough to say yeah that's a good point maybe the newsletter stuff like i don't know i think they should have bought substack maybe because still can still could potentially um but substacks just basically gets free i mean their advertising is but it has to be minimal i think we did a show on twitter like a year ago maybe a little longer maybe yeah and that was our exact growth opportunity it was by substack still hasn't happened so yeah all right well let's move into highlights and lowlights then ian what do you like and not like about twitter Yeah. So first I'd say it's just an awesome platform. I think it's the only social media that I've ever been addicted to at different times in my life. I've been thinking a little

bit about what Ryan was saying today too. And I think it serves as the modern day newspaper to some extent. And so I think both, you know, he was talking about how he starts his day with it. And I think that that's true for a lot of people that, Hey, I'm going to flip through Twitter, see what's going on, get a little, you know, have my cup of coffee and figure out what I'm going to do today. And I think the news bundling idea makes a lot of sense too, that that's kind of right upstream from what a lot of people are, or sorry, right downstream from what a lot of people are using Twitter for currently. And so it makes a lot of sense. I also think it's well poised for the rising creator economy, as I was just saying. And so if they can take advantage

of that, I think they've got a big opportunity that there's a lot of creators on Twitter. And right now they don't have a platform to help those people monetize in a real way. But if they did add some tools, I think that that'll be a good thing. One last highlight actually for me is that they're generating a decent amount of cash flow. Even after SBC, they're generating about a billion dollars in the last 12 months in cash flow. And so the debt's not really concerning. And I'd like to see them go ahead and use some of that cash to try and pursue some of these growth opportunities that we've talked about. They've got a lot of cash on the balance sheet and don't really seem to be innovating that much. And so that would be something to see. On that note, my lowlights start

with that they don't really have a recent history of adding any sort of valuable products that they had. Twitter was a big hit, is a big hit. They've done a pretty good job with that product, obviously. But maybe Twitter Spaces has been somewhat successful. But you talk about in the last, even in just the last year, Twitter blew, super follow, fleets, tipping, even review as we were talking about seems subpar compared to substack so they're just they haven't really done a great job of that seems like the only thing that has a chance is twitter space is that's kind of getting momentum it seems like people continue to use that but everything else it's those stink yeah it's like a nice secondary thing to have on twitter if you want like live conversations

um i thought it would have flopped it was like it went through this peak cycle when clubhouse was super popular faded out and now it's finding like niche use cases where i like going in and listening well it's nice this is more organic built out because clubhouse had that thing where they kept getting on trying to get famous people on like elon musk stuff like that and that kind of seemed like it burned out the platform this feels more organic but obviously a lot smaller um ryan what are your thoughts well my highlights i think twitter has unlimited lives they can just keep trying stuff and if it doesn't work the platform's so good that it's like wow we tried like let's try another thing um and so as long as it doesn't compromise the core platform um

they can just they can just keep taking chances um and they also have 200 million daily active users and all the things ian said it's it's really a super addictive platform um low lights for me though i i just like there's there's something that's constantly holding me back i don't know how other than me paying and subscribing for twitter in some way or something on twitter which they seem reluctant to do i don't see how it's like a monetizable platform i don't think performance advertising is that successful i think they're just bad too though they're just bad like it's double whammy they're bad it's hard you know because can't they just not make it tweets like videos almost where, you know, like it's, it's takes on the spot. Yeah. I mean, just don't have

it like promoted tweets. It's gotta be the dumbest thing. Like just replace those with standard ads. I think, I don't know. They have no, no small businesses want to target on there. I mean, can't you do for local things? Like, I mean, think about this. Couldn't you do like local stuff for a sporting event or a tailgate or something, have small businesses advertise food, whatever the bar on Twitter, I mean, that should work, right? For all the different niches that are on there, they just seem to not be willing to invest in that product. I mean, if Facebook had Twitter, they would be doing that for sure. And it would be great. It's the best place for businesses to grow for free. I mean, we would not have nearly as many

listeners as we do today if it weren't for Twitter. We tried it once and it sucked. i wish we could yeah i wish we could pay and invest into twitter through advertisements if it worked but they don't no it doesn't what about you uh strong mode from a product perspective i think it's hard one of those modes that's hard to quantify but you kind of just feel it that it's no one can really compete with them in their niche after you've spent three hours in your day on twitter yeah i start to feel it hey three hours well i mean yeah i said that said that timer um they have no realistic direct competitors. Like they have their social media competitors, but when you think about it, most of it, most of them are not competitors, really Facebook,

maybe for the some older people are more of the competitor for news there. I mean, breaking news discussion for finance, tech, sports, politics, and a few other things probably. I mean, no one, there's nothing else. I mean, people have talked before about how the Motley Fool discussion boards for finance basically got crushed. StockTwits got crushed by Twitter. Everything kind of moved over there and there wasn't really anything they can do about it no one's going to be able to replicate fin twit from that niche um good unit economics that's always a plus and i'm happy that dorsey's out because it seemed like he couldn't really get the product going maybe he had a lack of focus um low lights management though they talk about the new ceo you know i hope he does well but

he's been there for 10 years so if he's been in charge of the product for 10 years is he part of the problem i think possibly how much of a highlight are the activist investors i mean they haven't done much so far you know come on he's gone yeah but was that they're doing who knows but yeah he's gone yeah true that it could be they're doing i guess what we won't know but i mean still like come on that guy was basically dorsey's product guy and they're like no you do it you've been doing all these bad products now you get to run the company who knows maybe he's getting held back uh hopefully they do well and then but still the history of terrible product rollouts is probably the biggest low light for me just because you can't it's crazy to expect them

to change i think until we see it um all right bull case ian what's your bull case the bull case for me is that they find a path to 15 revenue growth and 30 even of margins which should get them to market beating returns if they can sustain that for three plus years from here The problem is that they've been unable to do this since 2015. They haven't had three consecutive years of 15% revenue growth or better since 2015. Wow. Which is pretty surprising with the growth of Twitter over that time. Even with that bull case, that would only be about 12% returns,

assuming a 20 times EBITDA multiple at the end of that three or three years. So I don't know that they do have a, they do have a path forward. And I think that 15% revenue growth and 30% EBITDA margins are attainable, but they've got to proof it, kind of like you were alluding to. You kind of want to wait to see what they're going to do. Yeah, the good thing about Twitter is the expectations are pretty low from the investors. All right, Ryan, what's your bull case? Yeah, I think mine's pretty obvious. I think mine's sort of the obvious one, which is they need to get more money out of their power users.

and that kind of goes without saying, but I don't even think they have to grow their user count that much as much as just like really monetize the people that care so much about the platform. Or let them do some sort of revenue share stuff like, you know, newsletters. Yeah.

So I guess like, I don't know, just find a way to increase average revenue per user, find some sort of maybe a subscription product or a bundle. But the problem is once... And it's so hard because once that rolls out and people start to see the success of it, it's kind of too late to invest. Yeah. Potentially. Maybe, maybe.

Potentially. It's an erratic stuff. It's like everyone's just waiting for them to come up with something. Well, I think that's what people thought. And some people are waiting without owning shares and some people are waiting while owning shares. Yeah. Yes. I think people thought that this year, if I'm looking at the chart and what was it, January, February of this year, stock totally went on a tear. I think they had an investor

day where they lined out their goals and they're like, all right, and now that's totally reversed. Mine, similar. It's such a simple one, but you have to see the path to probably $10 billion in revenue, annual revenue, and then improvements in advertising or the ancillary services like shopping, which I guess maybe isn't as smart as I was thinking beforehand, subscriptions, stuff like that. I think margins should get to 40% like Facebook's did at scale. They are pretty lax on their spending. So maybe they will never get there just from a discipline standpoint, but I think it should be similar stuff on 10 billion in revenue, 40% margins. I mean, that's pretty good versus the current stock price. But I think you have to see a path

there. You still, even though the expectations are pretty low, I still think you have to expect some growth. Like Ian outlined some more exact numbers there. All right. Bear case. Ian, what's your bear case? I think the bear case is that Twitter has already passed its peak of innovation and that it is never going to reach its mature cash generating potential. And so not only do you have a company that's no longer innovative, but you've also got a company that hasn't, It's not just spinning off a ton of cash as a mature firm. I think that if this were to be true, that Twitter over the next couple of years focuses too much on controlling the conversation and about trying to curate the conversation and

not enough about creating great products for its users, that it's passed from becoming a user-focused company into more of an image-focused company. And that as a result of that, if that were to occur, that the platform experience is a slow decline as users start migrating to more innovative platforms over the next five to 10 years. And that's just a kind of a slow burn and that it never actually is spending an awful lot of cash and it's not innovating to create new products either. That's good, Brian. What do you got? They just can't find a way to monetize their existing users better. I think if it's just the ad platform that it really is right now, even if they make like incremental improvements to the

advertising algorithm it that doesn't strike me as like a market bidding investment um i i do think like i said the bear case is somewhat limited because they get that unlimited lives because so many people are addicted to the platform and they come back every day regardless of product flops yeah so except all the cash that should be returned to shareholders to go into r d yeah and where's that r d showing up that's yeah yeah that's the big concern yeah so i do think maybe they're wasting wasting some cash but like i said bear case is still for me somewhat limited feels like a low floor but i mean it's not like they have physical assets so i don't know well they're spending all that capex on something it's all servers they have servers

but I mean, they don't have too much PPE. This isn't a book value play. My bear case, I think the one thing I'm looking for that I think they're bad at right now is to stop releasing half-baked products and bad advertising. If those continue to happen, I don't think it can be a good investment. If advertisement doesn't improve and they keep releasing products that don't seem to actually be well thought out, I don't think the investment's going to do well. All right. More less interested in i'm less interested and it feels like i've been saying that just about every week for the last um couple of months but it's just it's a company that i want to be bullish on and i i like the experience i think there's a lot of good stuff about twitter but i just i can't i

can't get excited about owning it and um then i think we've we've kind of outlined those reasons today but um yeah i'm a little less interested all right ryan yeah i'm less interested uh i guess for all the reasons we cited earlier it's just hard to know like the future the future feels really uncertain um and so yeah i'm just gonna go with less interested i'll be keeping up with it i don't even need it on my watch list because i will keep up with it every day yeah less interested yeah less interested for me uh it's just what we outlined until things improve until management gets changed up maybe they have too much tech debt where this is impossible to fix i just don't know where the big growth in cash flow is going to come from however i think we all agree it has

that potential um to be a huge home run for investors so if you disagree with us i hope you do well and i hope i think as users we hope we do well too so uh all right you know the product will be improved because of it. All right. Stock for next week, Ryan, it's your choice. And speaking of Twitter, you did the poll on Twitter this week. So follow the Chit Chat Money account on Twitter, look it up. You'll be able to see it. What was the poll and what did everyone choose? It was a tight race. Yeah. I guess if you're not on Twitter, I offered four companies, let the followers kind of vote on them. I had Lemonade, Encino, Freshworks, and Coinbase. It was a very tight race. Lemonade was winning until like an hour left. After I sent in the robots,

after I sent in the bots. Coinbase etched one out, 39% of the votes versus 38% for Lemonade. Yeah. Should be a fun one. So yeah. And that's, it's a pretty fascinating one. I think we've talked about Lemonade before, so I was kind of glad Coinbase won. And it's a fascinating business, kind of a controversial one. So yeah, look forward to it. Yep. All right. Well, that's going to do it for this episode. Thank you all for listening. Remember, we are not financial advisors. Anything we say on the show is not formal advice or recommendation. Ryan and I are general partners at Arch Capital. Arch Capital clients may hold securities discussed in this podcast. Thank you all for listening. We'll see you next time.