To The Moon

$Twitter(TWTR)$   KEY POINTS

• Twitter has struggled to accurately measure its audience over the past eight years.
• Its oft-overlooked data licensing business can be easily abused by high-frequency trading firms, unscrupulous media outlets, and oppressive governments.
• It paid nearly $1 billion to settle two big lawsuits over the past year.

The social media company faces a lot of near-term challenges.

Twitter set ambitious growth targets during its analyst day presentation last February. The social media company claimed it could grow its monetizable daily active users (mDAUs) from 192 million at the end of 2020 to over 315 million by the end of 2023, and more than double its annual revenue from $3.7 billion in 2020 to "over $7.5 billion" in 2023.

Those goals initially impressed investors, but CEO Jack Dorsey's abrupt resignation last November cast a dark cloud over those plans. His successor, Parag Agrawal, was also a controversial pick because he once declared that Twitter's role was "not to be bound by the First Amendment."

That controversy eventually drove Tesla $Tesla Motors(TSLA)$ CEO Elon Musk to launch a hostile bid for the entire company for $44 billion in late April. Twitter eventually accepted the deal, but Musk subsequently accused the company of inflating its user numbers with bot and spam accounts.

As a result, the deal remains in limbo and Twitter's stock trades more than 40% below Musk's "best and final" offer of $54.20 a share. But for now, smart investors should keep in mind three other things about the company that might eventually affect the outcome of this messy deal.

1. Twitter has repeatedly struggled to count its users

Unlike most othersocial mediacompanies, Twitter has repeatedly adjusted its user measurement standards over the past several years. Back in 2014, the company admitted that "up to approximately 8.5%" of its active users were likely bots that "automatically contacted our servers for regular updates without any discernible additional user-initiated action."

In early 2015, it abruptly lost about 3 million monthly active users (MAUs) after Apple $Apple(AAPL)$ stopped allowing its Safari browser to automatically pull links from a user's Twitter followers. Up until that point, Twitter had been counting those automated queries as "active" users. It lost another 1 million MAUs after Apple's iOS update temporarily broke its password encryption system.

In 2019, Twitter replaced its MAUs, which had been declining, with mDAUs to emphasize its growth in monetizable users. But during its first-quarter report this April, the company admitted that it had accidentally counted multiple accounts that were linked to a single user as separate DAUs for the past three years. It said that this miscalculation only reduced its total mDAUs by less than 2 million, but it sowed even more doubts about its ability to consistently measure its core audience.

In its first-quarter report in May, Twitter said fewer than 5% of its mDAUs were "false or spam accounts." Musk is disputing that claim, and the acquisition will likely remain on ice until that argument is resolved.

2. Its data licensing business is controversial

Twitter generates most of its revenue from ads, but its data licensing business (now known as its "subscription and other" segment) still accounted for 8% of its top line in its latest quarter.

This business licenses a "firehose" of public tweets to large customers for analytics purposes. However, some of its applications are highly controversial.

High-frequency trading (HFT) firms use that firehose to power their rapid-fire trades, which likely contributed to several "flash crashes" in recent years. Media outlets often use its firehose to follow recent events, but weak fact-checking standards can lead to the proliferation of fake news.

The Saudi Arabian government has also reportedly used that firehose to hunt down and persecute dissidents, which should raise some concerns about the Saudi prince Al Waleed bin Talal Al Saud being Twitter's second-largest shareholder after Elon Musk. In a stunning move earlier this month, Twitter also granted Musk full access to its entire firehose to address his concerns about bots and fake accounts.

3. It recently paid huge litigation fees

Twitter lost nearly $1 billion to lawsuits over the past year. Last September, it agreed to pay $809.5 million to investors in a class action lawsuit related to some goals it set back in 2014.

At the time, Twitter claimed it could reach over 550 million MAUs in the "intermediate" term and more than 1 billion MAUs over a "longer term." However, it only reached 321 million in MAUs in the fourth quarter of 2018 before it discarded the metric altogether in the first quarter of 2019. That massive settlement was the main reason it posted a net loss of $221 million in fiscal 2021.

This May, Twitter agreed to pay $150 million to settle a privacy lawsuit with the Department of Justice (DOJ) and Federal Trade Commission (FTC). The company had been sued for "unintentionally" using its users' phone numbers and email addresses to craft targeted ads.

These settlements probably won't throttle Twitter's long-term growth, but they highlight the company's tendency to overpromise and underdeliver while making careless and costly mistakes.

Twitter still faces a lot of problems

It might be tempting to buy the stock as an arbitrage play right now, but it faces a lot of near-term challenges. If Musk eventually walks away, Twitter couldcontinue to struggleto expand its audience and stay relevant in the maturing social media market as arecession loomson the horizon.

source: Leo Sun