Can A Much-Hyped Partnership Rescue This Social Media Stock?

Twitter (Nasdaq: TWTR) has been the worst social media stock to own over the past year. And that’s no easy feat. 

Shares of LinkedIn (Nasdaq: LNKD) have fallen 54% over the past twelve months. Yelp (Nasdaq: YELP) is off 56% over the same period. The online advertising market has been unkind for these social-focused companies. 

But none of those falls rival Twitter.

Shares Twitter are down more than 65% in just the last year. They’re also off more than 33% from the 2013 IPO offer price of $26. As a Twitter shareholder myself, the journey has been especially painful. 

However, after all the negativity surrounding the company — which has ranged from rumors of changes in character limits to an exodus of top executives — Twitter could finally be hitting a turning point. 

#-ad_banner-#Twitter has been having issues attracting and keeping users. The changes it has made recently, including revamping the “Moments” tab and changing its timeline algorithm, won’t be enough to keep users engaged over the long-term. Instead, Twitter needs to be leveraging its own platform and unique ability to mesh live content with social to grow users and revenues.

The Potential Game Changer 
I’ve long thought that it would take a major deal with an entertainment or media company to help advertisers and users realize the value in the Twitter platform. Well, we finally have that big partnership. This month Twitter inked its first broadcast deal, with the National Football League. The partnership with the NFL will give Twitter the rights to stream 10 Thursday night NFL games for the 2016 season. (These games will also be broadcast on traditional television networks.)

This deal has been met with mixed emotions. Some believe it won’t do enough to turn Twitter into a must-have service, while others think it could really juice revenues over the long-term. I think it’s a good move. Let’s not forget that football is still the most watched sport in the United States. And the this isn’t just a great deal for Twitter — it’s also a great deal for the NFL… 

The Perfect Partnership
Twitter got the deal for roughly $1 million a game. It’s a risk, but one worth taking for Twitter. The cost is minimal in the context of Twitter’s strong balance sheet, where it has $4.7 billion in net cash. 

Twitter managed to beat out the likes of (Nasdaq: AMZN) and Verizon (NYSE: VZ) to get this NFL partnership. Those companies were offering more than $15 million per game. 

So, the NFL didn’t choose the highest bidder. Rather, it picked the company with the best platform for distributing live content that can reach the most viewers. And the more underrated angle here is that Twitter managed to beat out Facebook (NYSE: FB), which the NFL shunned because of its less-than promising plans to monetize the games. 

The deal is a also a win for the NFL, which is facing its own problems., The old model of charging cable networks millions of dollars to broadcast NFL games is no longer viable in the current cord-cutting and streaming-focused media industry, making the deal with Twitter a way forward.

Further Down The Road
The partnership is more of a long-term play for Twitter. 

And it’s a cheap experiment for Twitter, which has the potential to justify just how big video streaming can be in the social media space. Citigroup (NYSE: C) ran the numbers to show the potential user growth for Twitter. In 2015, there were nearly 20 million Thursday Night Football viewers – about half of which Citi says weren’t Twitter users. Assuming those numbers are similar for 2016, if Twitter converts just 10% of the Thursday night game viewers into users, the acquisition cost would be just $12 a user. That’s a solid investment, as Twitter’s ad revenue per user in 2015 was $19. (However, the same study showed that if only 2% of viewers become Twitter users, the acquisition cost would be $48 per user.) 

If things go well with the NFL, Twitter might have a much larger role in streaming professional sports in the future. The key is to tap into the cord-cutter and cord-never generation, which are those that have been canceling their cable subscriptions or never signing up in the first place. As well, many of the NFL’s major partnerships with cable networks are set to expire by 2021. 

Other sports organizations or entertainment networks could follow the NFL model, which would help Twitter boost audience and advertising. 

Risks To Consider: Engagement and user count could continue to fall at Twitter, especially if Twitter fails to execute on the NFL partnership. One big issue being that viewers of the NFL games won’t actually have to create an account or login to view the games.

Action To Take: Twitter shares below $20 a share look enticing. Trading at 5.5x sales, it’s cheaper than Google (Nasdaq: GOOG), Facebook and LinkedIn. For investors looking for a unique way to play the live streaming and social markets, Twitter is the best play. 

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Disclosure: Marshall Hargrave owns shares of TWTR.