Twitter Expected to Struggle in Coming Quarters – Currently Grossly Overvalued

Twitter IPO experienced huge success and created buzz of exponential growth potentials. The current environment of Internet centric companies garnering high valuations supported Twitter equity price and investors jumped into bandwagon to make profits in long terms.

Recent acquisition of WhatsApp by Facebook also fuelled analyst optimism. Post IPO most of the analyst cautiously optimistically supported valuation as Twitter projected aggressive approach to acquire more user and subsequently monetizing user assets.

Q4, 2013 results and projected 2014 offered few shocking facts around Twitter struggle to acquire more users. As the monthly active user base growth were in high single digit but showed good traction of Mobile monthly active user base of 184 Mn.

The growths in developed geographies are muted whereas Twitter is focusing on Emerging countries to gain more user base. One such example is their collaboration with highly successful TrueCaller to generate additional traffic as well as create an environment to lure additional user base on Twitter platform. The current monthly user base of around 241 Mn is generating around $0.3 Advertisement revenue per active user per month. Notably Twitter 90% of revenue comes from Advertisement. The EBITA margin for Q4 and 2013 came around 18% and 11% respectively. Interestingly most of the investors ignore stock based compensation which inturn will dilute total equity and its impact on Earnings per share.

On considering projected 2014 revenue range of $ 1.15 to $ 1.2 Bn seems distant. To achieve revenue and EBITA growth of around 85% and 100% YoY require Twitter to achieve 50% monthly active user base to command higher price point for advertisement.

The major hurdle for Twitter is to convert Emerging geographies into revenue generating userbase. It is very common in emerging countries that new user uses any service for few months and then move to another one. The micro blogging segment falls into premium service whereas messaging falls into mass segment. The recent move by Twitter is to monetize their user inventory to attract advertisers but it also irritated many loyal userbase. Given the current trend of user adoption, even if Twitter achieves 20% growth in monthly active user would require to generate minimum $1.11 per active user to achieve forecast for 2014. Does one feel that it’s achievable! The current market capitalization of around $30 Bn and EPS of (-$3.41) clearly indicate that Twitter is far from growth which is experienced by peers. The projected capex of 330-390 would put pressure on their cash flows and current cash position of $2.2 Bn is going to be used in future to expand their base. With bleak success probability, it is widely expected that any quarterly disappointment in Q1 and Q2 is going to bring down current share price downwards drastically as the indication were offered post Q4,2013 result.

In my point of view, Twitter will continue to struggle due to attached service nature which falls in select categories and further monetization effort may trigger exodus of loyal user base as the beauty of Twitter service was its cleaned service offering. On emerging market segment, they may face uphill task to grow due to regulatory and other aspects. Why not to invest in dividend yield based companies with strong market positioning such as Oracle, Cisco System and many others

Whatsapp And FB Deal Educated Many – Voice Initiative Must Brace For Surprises In India

The acquisition of WhatsApp by Facebook attracted pro and cons assessment. As I mentioned in my previous blog that Facebook intention was simple and that was to eat out potential competitor. The deal brought Oracle acquisition of PeopleSoft, Siebel and SunMicrosystem to protect their turf and pricing power.

Facebook also realizes that their major chunk of active user base is from Emerging countries including India and WhatsApp India user base is around 35 Million. Whatever is the deal proposition but it offered enough insight about hidden revenue potential by indirectly targeting user base.

It also opened multiple open issues which industries and regulators are trying to answer. Some Of Them Are As Follows

• What is the use of UASL regime in India if any OTT players comes in and capture market with minimum to no investments?
• Is there any regulatory loop hole which is being used by OTT players?
• Do OTT players know about Indian regulatory environment and its implications?
• Did regulators neglected OTT segment and missed to regulate the same?
• Why telecom operators are forced to buy in spectrum to offer Voice and text services when the same can be realized without buying any spectrum?
• Why regulators missed to identify the revenue leakage from OTT applications where OTT players used data path to reach out to user base and indirectly inflicted Mobile Operators with major revenue drainage?
• Why Applications segment is non-regulated?
• Why OTT players using Telecom network path as delivery mechanism are not being forced to buy in licenses?
• And Many more

The above queries are only few one and it clearly offers one answer that regulators must be more visible in order to maintain level playing field. Interestingly, major service providers as well as government officials also started talking about regulating OTT players.

One must recognize that OTT players offer great level of value to end user but at the same level inflicted major impact in negative way to Telecom ecosystem.

The recent announcement by WhatsApp that they would be coming out with Voice enabled service. With the attached service like social networking, messaging and voice, Facebook may kill their competitors.

It is widely expected that Facebook may face lots of hurdle from Indian Telecom ecosystem even though Facebook CEO met Indian Telecom Sector visionary to expand Internet.org initiative.

I am pretty sure that the Indian Telecom regulators, MHA, Intelligence Agencies will not leave any stone unturned to make sure of compliance as well as monetization for government.

It would be interesting how Blackberry position its BBM service against impeding move by WhatsApp

Adoption Pattern Analytics Are Driving Few Application Companies Valuation

As all must be aware that WhatsApp or any other messaging Apps are not free or nominal fee post one year should not be considered as low cost but being a user, you are generating Hundreds of $ for messaging and other apps. All users know that it’s mandatory for user to provide their information before getting the full fledged Applications or messaging applications.

Indian users generally opt for such services or product which is free with a perception that “if I don’t like then will delete the specific Application”. These Applications developers are in the business of collecting contextual data and offer additional services or do collaboration with other companies to cash down the collected contextual data.

More interesting, many of such companies don’t have any understanding about Indian user ecosystem but interested in just collecting data and to some extent violating Indian regulation. It is correct that such Applications companies may get high valuation because of user information instead of Application features. Recent rush of e-Retailer and brands looking for targeting marketing added fuel.

One should not be surprised that by July 2014, many Application providers offering free services and in the business of collecting contextual information would look for shelter. Many investors would also be facing risk of losing their investment.

Why Whatsapp And Facebook Investor Would Lose In Long Run

In next series of giving detailed insight about the gaps of FB-WhatsApp deal which in one or another way is going to hurt FB investor dearly and WhatsApp investors heavily. I was surprised to see deal news splashed all over internet. Somebody termed it Facebook move to protect its own turf and I was among those whereas some termed it as expensive one. It also started new discussion war among Analyst about the potential valuation of existing messaging Apps by keeping WhatsApp deal as threshold. In my point of view, both WhatsApp and FB investor is going to lose.

The purpose of FB was to acquire mobile centric user with highest probability of repeat users. Even though both the organizations are claiming that they won’t be supporting Ad filled revenue opportunities but do readers knows that

In just released Q4, 2013, Facebook generated $2.59Bn revenue and Ad revenue was $2.34 that translates in 90.34% revenue coming from Advertisement and mere $241 million revenue coming from other sources.

At the deal announcement time, Facebook promised WhatsApp $4 bn Cash, $12 Bn in Stocks and $ 3 Bn in restricted stock option. This will dilute FB number of total shares by 8.66%. At the same time, FB is going to offer 222 million shares to WhatsApp owners. It is going to put pressure on FB to sustain the same growth rate of 50% and 30% in revenue and net profit respectively.

It is also interesting that the FB Earning per share ratio of 111.3 at the time of deal which indicates the inflated valuation on the back of exponential growth expectation due to new love of ad attached revenue. Single $ fall in FB share price is going to lower the deal price by $222 million. Currently, FB share prices at and around its lifetime high and pundits are expecting higher share price moving forward. One must be careful about uneven behavior of Internet attached business.

1. Do anyone remember once the darling of Internet MySpace.
2. What happened to AOL
3. What happened to Orkut
4. What happened to Microsoft multi Billion $ acquisition of Skype
5. What happened to Cisco multi Billion $ acquisition of WebEx

One misstep or even simple Application offering may act as havoc for both the company investor. I am expecting that Facebook cleverly attached deal through provisioning and infact invested only $4 Billion in cash and fair value of Facebook share even at flashy growth is not more than $25. It would translate the whole deal around $9 Bn plus. Its my personal assessment and opinion and would recommend investors to be in or out of the Facebook equity given their own assessment. I am expecting huge write-off by Facebook in next 2 years.

Facebook Gulped Potential Threat Whatsapp

For the last 24 hours everyone is talking about Facebook acquisition of WhatsApp. The whopping price point raised everyone eyebrows. Everyone is talking about Facebook strategy to acquire user base and monetize through Advertisement. The interesting part of the whole acquisition is bit ignored. Facebook observed growing popularity of SnapChat in US whereas WhatsApp growing presence in emerging countries. Now a day’s most of the device manufacturer preload WhatsApp by default as it’s the expectation of mobile device buyers that WhatsApp must be there. Facebook captured market place from Orkut because of its offering of Photo sharing and snatched most of the active Orkut user base. WhatsApp story is nothing different. In last 3 years, there simplistic user interface and privacy through groups attracted active mobile user and sharing of information started happening on WhatsApp. More interestingly that the services offered to users were free from advertisements. Facebook must have seen the deflection of user interest as well as observed heavy traffic on WhatsApp. Buoyant by Dec 2013 result where Facebook successfully demonstrated impressive growth through advertisement and shifting access trend on Mobile from Web also attracted Facebook interest to captured riped fruit which can be readily used to mint advertisement money and command premium for pushing targeted advertisement. Still I would term this deal as” New Time Warner and AOL merger” and in next few years Facebook would regret for its decision to acquire potential threat.

Why International Application Providers Are Targeting Weak Regulatory Environment Of India For Investments

In recent past, most of the companies are moving from wired level access to wireless level access mechanism post explosive growth in mobility segment post phenomenal adoption of Android mobile ecosystem. Many young and experienced entrepreneurs captured the potential opportunity in the Application segment given the explosive growth in Smartphone segment as access medium. The adoption of chat services both on text and voice level started the dynamics of the mobility segment. The success of WhatsApp acted as motivational factor for new entrant into the segment. The ongoing bubble in the Application segment where everything thinks of making money by reusing contextual pattern of mobile user created competitive environment among Application developer to rush for user acquisition.

The housing bubble burst, financial crisis, manufacturing downturn in US, EU and other part of world prompted investors to look for new avenue to invest. The tough regulatory environment in China, EU and US and language barrier prompted International Application Companies to turn their focus towards India. Given the huge consumer base of more than 744 million mobile users’, growth forecast in Smartphone segments and loosely coupled regulatory environment in India offered hassel free environment to application companies to gain consumer base faster than the other geographies. Most of the application developer works on the Application UI/UX and mapping it with basic backend system with a focus to capture only the contextual pattern of the user. Given the boom in Big Data domain, Applications instead of network domain are now considered the best tool to analyze the adoption trends. The main goal of Applications developers/companies are to collect the contextual pattern and accordingly push usages behavior centric Ad or other Application push.

It is also interesting that the Applications developers from sector such as BFSI, Utilities, Infotainment, Entertainment or Social are relying completely on Advertisement revenue compared user charging model. Most of the Application providers are not being able to charge consumer base given the regulatory environment in India. Even more interesting that most of the Application developer companies are not even aware of regulatory dynamics in India and for them legal opinion is equal to regulatory opinion.

Due to the segregated regulations and absence of Application regulation created an easy path for both domestic and international Application companies to push Applications to Indian consumers. Easy acquisition of userbase enables Application companies to offer selling points to their potential investors about prospects of revenue potential to prospective investor group. Many international Application companies are even clearly violating Law of Land by not adhering to the regulation w.r.t Telecom, IT and Cyber Security Law. Some of them only hire sales representative in India to run their business without opening office in India. Due to such companies engaged in collecting contextual pattern of users as well as playing with valuation game, Indian mobile users are getting more pesky calls, SMS as well as premium service redirect attacks. The lack of awareness among Indian mobile users makes it even more difficult for mobile operators to track premium number redirect attacks and inturn losing millions of dollars in lost revenue opportunities.

It would be disastrous for both PE investors as well as such companies engaged in taking undue advantage of current environment once combination of lawful agencies of India comes out with stringent regulation for such companies to operate in India. Such companies must recognize the power of open platform but should not misuse it as it would spoil the whole ecosystem. At the same time, applications users must be vigilant to raise unlawful activities of such companies so that law abiding application companies gets their deserve right to be successful.