Twitter Inc (TWTR): MKM’s “Increasingly Bullish”

Twitter Inc (NYSE:TWTR) has been battling negative sentiment as investors worry about user growth. However, MKM Partners analysts say that issue is very fixable and that the microblogging company has great mass market potential.

Twitter’s problems

In a report dated July 15, 2014, managing directors Rob Sanderson and Wendy Farina said they finished the third volume of their study on user trends on Twitter. This segment of the survey focused on user experience and attrition. They say the microblogging company’s biggest problem is user attrition and cited a couple of stickiness indicators. First, they say almost half of users that leave Twitter do so after they try it just “a few times.” They found that 11% of them leave after less than a month.

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In addition, they say retention and stickiness metrics remain strong for tenured users, especially after the three-month mark. They say approximately half of those who took part in their survey use the microblogging platform every day. About a third of them log on “several times” each day. Twice as many of them plan to use Twitter “more than those that intend to use it less.”

Improving user experience on Twitter

The MKM team found that Twitter can solve its user attrition problem by improving user experience and streamlining content. They say the two biggest issues reported are ease of use and content relevance. According to their study, 43% of past and current users are negative to neutral on the microblogging platform’s usability. They found that 70% of those who left said the content wasn’t relevant to them, while 20% said there was too much content and 20% said it was too difficult to use.

If Twitter fixed these two problems, almost half of the users who left said they would or may consider signing up again.

Why MKM is “increasingly bullish on Twitter”

The analysts say they’re liking Twitter more and more for several reasons. First, they say Twitter’s ads perform better than Facebook Inc (NASDAQ:FB)’s ads. As a result, they see plenty of room for Twitter to close the gap with Facebook on revenue per user and possible even exceed Facebook’s numbers.

Twitter QoQ trend

They also say Twitter’s new ad formats and international efforts are important. They’re projecting about $1 billion in app install ads for Facebook and expect Twitter to become “proportionally comparable,” suggesting the potential for $200 million in incremental revenue. They also like the company’s video ad potential because of its focus on TV networks.

The MKM team said they don’t think Twitter needs to “completely fix” the experience for users in order to see “an inflection” in growth because of its “very high gross additions.” They predict that Twitter could be worth $120 billion in five years if the company continues improving its ad monetization and user growth, potentially going mainstream in the process.

Twitter’s demographics

They also said that most investors think Twitter is focused toward a “younger, highly educated / affluent demo that uses the service for breaking news or to follow celebrity loud-mouths.” However, their study showed the opposite. While the demographics did skew younger, it was still older than most investors think. Users over the age of 45 declined from 27% to 17%, but the over 35 segment remained nearly half of their sample.

Income and education levels were skewed “lower than the national median,” and interest categories “are very well distributed.” They say all 11 of the categories they covered still receive a greater than 20% response rate.

The analysts reiterated their Buy rating and $55 per share price target on Twitter.