Twitter Is Focusing On Its Core In Order to Turn a Profit

By Adam Levy Markets Fool.com

Image source: Twitter, copyright Aaron Durand (@everydaydude) for Twitter, Inc.

Continue Reading Below

When Twitter (NYSE: TWTR) released its third-quarter earnings results, it announced plans to lay off 9% of its workforce. The move was part of an effort to become profitable in 2017. Twitter lost $103 million in the third quarter and $290 million through the first nine months of the year.

But Twitter's workforce isn't the only thing slimming down. Twitter is also laying off some of its underperforming products. The most recent is Fabric, Twitter's software development kit for mobile apps. Google -- the Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL) subsidiary -- is buying the business for an undisclosed amount. Twitter also shuttered Vine earlier this month as it focuses more on its core platform to generate a profit.

Twitter is having a fire sale

Rumors swirled for weeks last autumn ahead of Twitter's third-quarter earnings that Twitter was trying to sell itself. After failing to find a buyer, Twitter is faced with the reality that it needs to show it can become profitable in order to either attract better takeout offers or attract more interest on Wall Street.

It tried to sell off Vine, the six-second video app it bought and brought to market. Nobody bought it, so it had to shutter it. Google's interest in Fabric was fortuitous, considering Facebook (NASDAQ: FB) never found a buyer for its software development kit, Parse, and shuttered it last year.

Continue Reading Below

Neither Fabric nor Vine ever generated revenue for Twitter. Both were designed to support the Twitter ecosystem, improving the functionality and engagement on the core platform. That didn't really happen, though, and Twitter's functionality and user base have remained the same for some time now.

Twitter still has various businesses that generate varying amounts of revenue. By and large they remain tied to its core platform. The only major exception is Periscope, its live-streaming app. The company just bought Periscope two years ago, but with the growth of live-streaming thanks in part to Facebook, it could likely find it a new home. Still, Twitter may be better off migrating Periscope's users to Twitter's new live-streaming feature and shuttering the original app.

Ultimately, Twitter seems intent on selling itself off piece by piece until all that remains is the core revenue generating businesses -- advertising and data licensing.

What is Twitter focused on for 2017?

Twitter seems most intent on growing video on its platform. Most recently, it signed a deal with Dick Clark Productions to live-stream the red carpet shows from various award shows later this year.

Twitter views premium event streaming as an opportunity to engage its light users. In its third-quarter letter to shareholders, Twitter noted that light users watched more Thursday Night Football than medium and heavy users. Increasing engagement among light and logged-out visitors is one of the biggest opportunities for Twitter to build engagement and acquire new users -- one it's been talking about for several years now.

Twitter also launched live video within its own app last month, a feature that lets anyone start streaming live. It basically does the exact same thing as Periscope, but it's more integrated with Twitter's main platform. Twitter was originally hesitant to merge the two products, but the success of Facebook Live may have swayed the product or management team.

Video was Twitter's top revenue-generating ad format in both the second and third quarters last year. Investors should expect continued efforts around delivering more organic video in a bid to attract more premium mobile video ad budgets. Twitter sees video ads as a much larger market than the generic social media advertising market.

An imperfect plan, but it just might work...kind of

Twitter appears hell-bent on meeting its goal of reaching profitability in 2017. It's reducing its workforce, cutting out overhead from products like Fabric and Vine, and investing all it can in premium video-streaming deals. After more than a year without significant user growth and slowing revenue growth, Twitter is officially exiting growth mode and focusing on the bottom line.

Twitter may very well turn a profit in 2017, but it's guaranteed to be a much smaller profit than investors initially expected when the stock went public three years ago. (Of course, that's reflected in the stock price.) Additionally, its ability to grow profits without a growing user base or product pipeline is questionable.

While management isn't wrong to start focusing on profitability, it seems to be thinking more short-term than long-term in order to reach a self-imposed goal. A goal, I might add, that seems more focused on finding a buyer than building real value for shareholders.

10 stocks we like better than Twitter
When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*

David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now... and Twitter wasn't one of them! That's right -- they think these 10 stocks are even better buys.

Click here to learn about these picks!

*Stock Advisor returns as of January 4, 2017

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Adam Levy has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Facebook, and Twitter. The Motley Fool has a disclosure policy.