Sorry for the corny title, but I’m serious. Twitter’s ($TWTR) decision to expand to 280 characters might seem like something to laugh at, but it’s actually an excellent business decision. It is one reason why 2018 should be a boon for Twitter bulls. Their road to success is clear.

Twitter Is Unique

Before we understand why 280 characters is important to Twitter’s revenue growth, we have to understand their platform. Twitter is a hybrid between social media and news. In today’s fast-paced society, do you have the time to wait for some journalist at CNN, Fox News, The New York Times, NBC, CBS, etc. to write a story about something happening now? No. We crowdsource that stuff. Twitter is where it all happens. Twitter’s the best for minute by minute accounts during a rapidly unfolding event. It’s a dream platform for sports fans trying to get the scoop on an injured star or trade rumor. If you’re an NBA fan, you’re familiar with Adrian Wojnarowski’s tweets ahead of each pick. Sometimes, even a player finds out (on Twitter) that he’s been traded BEFORE HE HEARS IT FROM THE TEAM’S GM. Speed is the name of the game for Twitter. The platform’s ease of use and instantaneous shareability is what makes it special. Oh, and it’s also completely open-form. Where else can you interact with a celebrity, or interact with a star? Answer: Not Facebook. Not Snapchat. And definitely nowhere else.

Twitter’s Company Performance

Twitter is unique. However, it’s not without it’s flaws. The company has struggled to grow users. The company posted an extremely modest (even bad) 4% growth in Monthly Active Users (MAU) this past quarter.

Revenues weren’t much better.

Okay, so twitter is pretty bad at growing users and their year over year revenues are down. What the heck is wrong with me, right?

Tell me when you spot the correlation.

Bingo. When twitter sees higher engagement, they make more money. Moreover, they are lessening the cost per ad engagement. Said differently, they’re increasing their margins (making more money) each time a user engages with an ad. Finally, advertisers are smart. Marketers are consistently looking to stand out in front of the most engaged audience. As engagement increases, advertising dollars follow quickly thereafter. The ultimate earnings story is brewing.

Twitter’s 280 Character Decision

Back in early November, Twitter decided to increase its post size to 280 characters. Formerly, users could share something with a limit of 140 characters. While many mocked this decision, I believe this is will have a significant impact on Twitter’s earnings story.

These sentences are the ultimate example of how insanely short 140 characters is. People don’t have enough space to get their full point acr

Yeah that was 140 characters. Twitter’s decision to move to 280 characters is based on their gamble that more space to share opinions will lead to more sharing. Those against the decision opined that the move would clog up their twitter feeds and reduce engagement. Twitter explained their argument in a blog post:

Historically, 9% of Tweets in English hit the character limit. This reflects the challenge of fitting a thought into a Tweet, often resulting in lots of time spent editing and even at times abandoning Tweets before sending. With the expanded character count, this problem was massively reduced – that number dropped to only 1% of Tweets running up against the limit. Since we saw Tweets hit the character limit less often, we believe people spent less time editing their Tweets in the composer. This shows that more space makes it easier for people to fit thoughts in a Tweet, so they could say what they want to say, and send Tweets faster than before. You can see this happening in the graph below.

Twitter’s chart shows that people were spending more time fine-tuning their tweets to fit into 140 characters and thus spending less time actually tweeting their thoughts. It also found that people don’t use 280 characters just because they can. Instead, their thoughts follow a normal curve.

Early Results Are Good

So what about engagement? So far, they’ve been correct. According to SocialFlow, the early data has been quite bullish for Twitter. Users have been retweeting and liking 280 character tweets at about double the rate they do for 140 characters.

Investors seem to be catching onto this story. 2017 was actually quite good for Twitter’s stock, rewarding shareholders with a 47% increase in share price.

Is there more room to run?

Short answer: yes. Long answer: keep reading.

Twitter’s stock ($TWTR) hit a high of $70.43 back in December 2013, a month after its IPO. Since then, Twitter’s stock has been pummeled. It’s lost nearly 40% since it opened for trading at $40.50 on the Nasdaq in 2013. In fact, it’s still trading at roughly 6% under it’s expected $26 offering price (closed at $24.45 on 1/3/18). Here’s a look at the stock’s performance since it began trading on the Nasdaq.

Twitter’s valuation metrics are also not too bad. The company has a Current Ratio of 10.40, which means that their assets greatly outweigh their liabilities. Their debt to equity sits at 0.37, too. The San Francisco, CA based company has a price to book value of 3.74 and a price to free cash flow of 27.77. While neither are “cheap” by any means, investors in this market are still clearly valuing growth. Facebook, for example, is trading at a 7.4 price to book and a 33.78 price to free cash flow.

Not everything is rosy. The stock does trade north of 54x forward price to earnings (PE), though I don’t believe analysts have factored in the growth from the changes to the platform. Speaking of analysts, the average recommendation is 3.2 (1=Buy and 5=Sell).  As you can see, the tide has yet to turn completely bullish.

As you can see, Twitter’s stock isn’t crazily overvalued and it’s chart has been consolidating for 2 years now and looks ripe for a breakout. While I don’t think we’re going to see $70’s anytime soon, I do believe Twitter will continue its momentum in 2018. I don’t believe the $40’s are out of reach this year.

#ContrarianPlay

As always, please do your own research. This should not be taken as investment advice.