Twitter (NYSE:TWTR) seems heavily committed to licensing sports content, coming out of the prior quarter and shareholder meeting. So, we probably can’t rule out the possibility of the Olympic Games, or additional NFL games? I’m not completely sold on their licensing efforts as content costs were kept to a minimum from user generated tweets. However, given the limitations on improving the app through better design or functionality, the best case scenario involves further prioritization of live content.

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Efforts in live content could drive incremental revenue

Some interesting comments were shared on the prior quarterly earnings call:

As it relates to the NFL, we know that on Thursday nights during the 3-hour telecast of Thursday Night Football, we have millions of users looking at tweets about that game. And they are creating tens of millions of impressions that we know are very valuable to them and very valuable to our partners, both the NFL and of course our advertisers.

The key comment was “tens of millions of impressions.” This gives us some indication as to the likely effectiveness of licensing Thursday Night football, as I was heavily skeptical of platform reach when averaging the daily usage patterns of users. When I first did my initial assessment of platform reach, I anticipated roughly a quarter million in fully-engaged viewers for the entire length of the game. But, if the users checking into their accounts opt to watch Football on their devices (as implied by the quote from the management earnings call) then 10 million in unique users seems feasible.

According to Morgan Stanley,

The monetary attractiveness of these digital streaming rights is somewhat muted due to the fact that TWTR will not be able to sell any of the national advertising spots during the games (which are retained by CBS/NBC). As such, TWTR will only be able to sell the local affiliate ad spots...which make up roughly 2-3 minutes of advertising per hour." Based on those figures Morgan Stanley estimates that roughly 12 ad-units can be sold across 10 Football games. If we assume these ad spots are sold at a $45 CPM (in-line with other Primetime TV NFL CPMs) it would mean that 2% NFL streaming user adoption (or 1.1mn) would only add ~$6mn (or 0.3%) to 2016 annual TWTR ad revenue (See Exhibit 2).

I believe the assumptions by Morgan Stanley analyst Brian Nowak are valid, but what has changed in the past couple months has been management's commentary on the level of engagement during the Thursday Night Game. In so far as determining the level of revenue that can be potentially derived from the game, I believe that at 10 million active users, Twitter can generate 10 million in impressions for the 12-ad units that are implied by Morgan Stanley's estimates on revenue. If Twitter does sell 12-units at $45 CPMs over the course of the game, the revenue derived from that inventory should equate to approximately $5.4 million in revenue per game. Over the course of 10 licensed games that equates to $54 million in total revenue, licensed at a cost of $10 million.

NFL Thursday Night Football doesn't alter earnings/revenue assumptions by much

The NFL Thursday night football games will not change the earnings/revenue assumptions much. This is because Q4’16 is seasonally strong with revenue heavily weighted in that specific quarter. So with the consensus already anticipating $871 million in revenue (approximate), the impact probably won’t be as noticeable, as the implied variance to consensus is 4.5% in the best case scenario. If anything, Twitter needs to bolster its ad offerings given recent reports of agency spend prioritizing other platforms like Google, Facebook, and Snapchat as opposed to Twitter. Since Twitter generated less organic engagement per tweet when compared to other forms of advertising, it’s fairly obvious that investors can retract some of the optimism on NFL with some of the uglier comments on agency/big advertiser spending.

The Twitter stock seems to have stabilized following an unsettling quarter. For the most part, I really can’t get aggressive here at these lower levels as the fundamentals simply don’t line up with a technical chart formation. There’s not a very high likelihood of Twitter breaking into an uptrend without significant improvement in investor perception/company fundamentals.

Furthermore, there’s continuous risk that the management team doesn’t execute on a timely turnaround in user metrics. In the United States, the user metrics were flat q/q in Q1’16, and the inclusion of Thursday Night Football could bolster DAU metrics, but user churn is unlikely to be addressed with 16 nights of sports programming (what about the other 349 days in the year?).

Here's the best case scenario

Twitter will need to execute on live broadcasts and scale back R&D to convince shareholders of better cost management. Somehow, Twitter spent $800 million last year to deliver some new ad features, tweet length modifications and curation features via Twitter Moments. Does it really require 600 to 900 software engineers to develop minor tweaks to the overall user interface? A decent chunk of Twitter’s spending seems overly bloated, which speaks of the potential of further headcount reductions, as an enlarged developer team hasn’t resulted in massive quality improvements to the mobile/desktop product. WhatsApp does fine with 50 employees, and there are numerous cases where large software apps can be supported by a developer team no larger than 150 employees.

It seems increasingly likely that Twitter will shift to a more conventional media model. However, live viewing has struggled to transition very successfully to the web, as many online viewers prefer the time-shifted experience of on demand streaming. Hence, YouTube doesn’t have compelling live audience metrics even on some of the most popular YouTube channels (in many cases live audiences are below 1,000 viewers per live stream). Perhaps, Twitter could fill that void, but the company is running out of time. Since the company isn’t profitable, it would need to make some significant headcount reductions and then readjust the dollars spent to purely content.

If Twitter were to scale back operating expenses by 10% to 20% and redirect the spending on just content, the likelihood of a turnaround becomes more meaningful. However, Jack Dorsey doesn’t strike me as being that aggressive. A re-prioritization of spending, reduction in cost, and more pronounced changes to the UI need to materialize within a 12 to 18-month time frame to shift prevailing investor sentiment.

Jack Dorsey made a very small bet on live content and also removed guidance for MAUs in Q2’16. There’s more hiding than showing paired with weak commentary on user retention. However, if the results from Thursday Night Football prove promising, we’d then want to see a massive reduction in various costs with massive re-prioritization to content spending. In this scenario, Twitter will shift into a conventional media platform, which re-introduces some value risk because the comparisons are sparse with closest peer comps very un-compelling i.e. Yahoo and AOL (dot com busts). If Twitter’s new model proves both profitable and wildly successful among the pre-existing user base we can at least speculate on a turnaround in user metrics, and mass market appeal for Twitter. If that scenario doesn’t materialize we’re stuck with a stock that’s unlikely to trade above $20 for the foreseeable three-years.

Final thoughts

Given the speculative nature of this company, I would avoid the name. Upon evidence of recovering user metrics/ad-performance the stock could be interesting. But, it’s become too speculative to make a compelling bull/bear case within the next couple quarters. Second half 2016 is somewhat unpredictable due to one-time events, shift in ad-spend and user churn. Therefore, investors should still stick to the sidelines until a compelling trend in fundamentals re-emerges.