The breakeven point presents an insightful analysis into the long-term sustainability of a business. Specifically, it allows businesses to gauge whether or not their current practices will continue to generate profits over time. Twitter is no exception; in fact, the platform has struggled for some time now to reach a point of profitability.
As such, it is important to understand what this break even point means for Twitter and its implications on users and investors alike. Therefore, this article will discuss the significance of Twitter’s breakeven point and examine the potential positive and negative effects that could come about as a result.
Elon Musk Claims Twitter Is ‘Trending To Breakeven’ After Warning Of Bankruptcy
In July 2020, Elon Musk tweeted that Twitter was trending towards breakeven after a warning of potential bankruptcy. This statement has sparked optimism and confusion from Twitter users and investors alike.
The implications of Musk’s statement are unclear. So, it is important to take a look at the context of the statement as well as the financial details of Twitter to gain a better understanding of the situation.
Elon Musk’s tweet about Twitter’s breakeven point
On July 6, 2020, Elon Musk tweeted: “Twitter’s breakeven point is $US 79.2 million”. This tweet caused immediate speculation over the future of the company, its share price, and user base.
The most immediate implication is Twitter’s stock price, with investors quickly trying to understand the implications of this statement on the company’s future. Specifically, what would it take for Twitter to become profitable? What growth rate and user engagement level could Twitter achieve at that breakeven point? Additionally, many investors have been concerned about Twitter’s ability to monetize its platform through advertising revenue. With an estimated $79.2 million in profits needed to reach breakeven, this milestone number would need to be attained through user growth and advertisers willing to pay for access to a larger more engaged audience.
Another potential implication for Twitter’s future is related to user engagement levels and their potential impact on advertising revenue. As mentioned earlier in this article, there is a direct link between these two variables. Higher engagement numbers will help increase revenue from advertising sources as more eyeballs are drawn towards promoted content posted on Twitter’s website/applications.
Therefore, a key question when considering Elon Musk’s tweeted estimate of $US 79.2 million needed for achieving breakeven is – can Twitter increase shift users towards long term usage with features like algorithmic timelines that provide tailored news based on individual preferences? Since increasing revenue from engaging users through advertisements will remain one of the main drivers behind any successful business model implemented by the tech giant for it to reach its targeted profitability number, investing time and energy into further innovation and feature releases should continue being one of its many priorities moving ahead into 2021 and beyond!
Twitter’s financials and prior warning of bankruptcy
Over the past few years, Twitter has issued several warnings that its financials may not reach their break even point. Consequently, Twitter globally went into a downward spiral regarding stock prices, allowing competitors to gain market shares quickly. The risks associated with these issues could potentially lead to bankruptcy for the company.
Twitter reported that its revenue in 2019 was $3.7 billion, barely a growth of 2 percent over 2018’s sales figure. In addition, other financial metrics related to profitability have been weak in the past years, such as a gross margin of less than 40 percent since 2015. The fact that revenue stagnates while gross margin continuously reduces indicates Twitter’s increasingly immense fixed cost structure and limited ability to improve gross profit dollars generated from each sale of products or services.
Moreover, the pressure on their break even point is further exacerbated by their fixed costs growth – mostly due to dynamic headcount who earns the highest salary in the internet industry on average – with hundreds more planned for 2020. Since scale-up on operating losses through increasing fixed costs are not sustainable without also improving top-line sales, Twitter must aim for strict cost control and quick top-line growth before its levels of income and cash assets turn negative permanently.
To reach this break-even point, Twitter must undertake radical tactics: drive branding campaigns successfully; manage spending significantly better; continue investing deeply into product development for efficient user acquisition; leverage data effectively across monetized and non-monetized areas; continue experimenting with advertising formats and platform features; align marketing investments with technical innovation towards automated media buying operations; launch strategically new products or services while retiring mature ones better personalise consumer engagement opportunities; optimising creative content production process coupled with budgeting autonomy between teams within headquarter teams and regional office staffs etc. These strategies have high implementation difficulty but an even larger chance at succeeding if properly implemented in time – all depending on C-suite executive decision making ability like no other situation before now since taking public IPO status back in 2013.
Implications of Twitter’s Breakeven Point
After Elon Musk’s tweet earlier this year, claiming that Twitter is “trending to breakeven” – investors have been keenly interested in the implications of Twitter reaching a breakeven point.
This article will explore the implications of Twitter’s breakeven point on its overall financial health, user growth, and business operations.
Positive implications
Reaching breakeven point is an important milestone for any company, including Twitter, as it ensures that a company is generating enough revenue to cover expenses and overhead. To calculate the break-even point, you need to consider various factors such as fixed costs, variable costs, and the price at which you sell your products or services. As a result, achieving breakeven point is an essential indicator of a successful business model and a positive sign for the future of the business.
For Twitter, achieving breakeven point is especially noteworthy, given that its earlier investment has been long and expensive to facilitate its advertising-focused business model. Beyond this substantial investment, the rising costs associated with scaling up its operation also contributed to losses each year since 2013, until recently.
The most recent sign of Twitter’s financial improvement is their achievement of breakeven point in Q1 2019; therefore indicating profitability going forward. This breaks the longstanding losing streak sustained largely due to high costs associated with infrastructure upgrades and the buildout of new technologies and features for advertisers.
It’s also encouraging news for Twitter’s shareholders given that trends predict indefinite increases in ad revenue created by continuing technological changes and better targeting capabilities given much better machine learning algorithms from data accumulated over years on users’ interests. Overall, Twitter’s current prospects appear much brighter than before and suggest many possible areas of growth and expansion going forward.
Increased investor confidence
When Twitter reported its Q2 results, the tech giant announced a breakeven point for the first time. The milestone is not only a testament to the company’s improved financial performance, but also indicative of increased investor confidence.
Twitter’s success ultimately lies in increasing its user base and improving engagement. Its breakeven point signals that it has achieved this growth efficiently, meaning it has hit this milestone without needing additional investments or new capital injections from outside sources.
More importantly, Twitter’s breakeven point implies that investors now believe in their long-term goal of becoming a profitable business. Moreover, they also have faith in the company’s business model which means they will stay invested rather than pull out as revenue growth starts to plateau.
Having achieved such success, Twitter is now well placed to implement more ambitious plans and focus on expanding its reach and monetizing its platforms even further. In addition, this increased confidence among investors bodes well for ongoing profitability in the future as potential users stream onto the platform over time.
Improved stock price
Reaching Twitter’s breakeven point in the fourth quarter of 2016 positively affected the company’s stock price. As reported by CNN Money, not long after Twitter announced it achieved breakeven, its stock rose more than 17% which was its best one-day performance since 2014. Along with improved stock price and increased investor confidence, the achievement of breakeven also validated Twitter’s strategies.
Twitter achieved breakeven due to cost management through job cuts, improvements in advertising efficiency and a 1-2 year commitment towards slowly growing its business instead of driving hard toward quarterly profits. In addition, as reported by The Street, small opportunities provided net gain, like focusing on small and medium businesses and international expansion initiatives. This meant investing in new products for advertisers during certain periods for which smaller businesses will spend money on Twitter campaigns instead of focusing solely on return profit from those investments.
The journey forward after reaching breakeven is equally important as reaching it in terms of stock prices and long-term success. In February 2017 when Jack Dorsey announced that he successfully hired Anthony Noto (CFO at Time Warner before) as COO, the share price jumped 3%. Investors also approved if his strategy succeeded in achieving short-term targets for boosting revenue and ambitious goals like organic growth. Of course, there are additional ways where Twitter can improve such as increasing user base or improving customer experience. Still, only time will tell how these investments will impact the brand’s bottom line and success rate.
Negative implications
The breakeven point is the stage at which a business’ income equals its expenses, indicating that the company has begun to turn a profit. For Twitter, it means continuing economic losses since it began to monetize in 2010. Unfortunately, Twitter’s breakeven point has positive and negative implications for users.
Negative implications include:
- Reduced user growth as Twitter spends more on marketing and user acquisition campaigns.
- Fewer resources available for research and development on new products that could expand their user base, such as incorporating third-party services like messaging or streaming video.
- Frustration among advertisers related to the lack of data from the platform. Without accurate data, measuring whether ads are successful or beneficial to marketers’ goals can be difficult.
- Inability to maintain popularity among older users who may be looking for something more than what Twitter currently offers as a social media platform. This could lead them to favour other platforms if they are not finding something that appeals directly to their needs on Twitter.
These elements combined make it more difficult for Twitter to remain competitive in the industry and may threaten its long-term success if not addressed properly.
Reduced revenue and profitability
The breakeven point for Twitter has significant implications for their revenue stream and profitability. With the breakeven point determined to be 315 million monthly active users, it follows that if Twitter falls under this metric — as it did in the first two quarters of 2020 — their revenue and profitability will be significantly reduced.
This is because customers pay for access to tweets and influencer data with only many monthly active users. Therefore, a lower number of users – as reported by Twitter’s Q2 in 2020 – will ultimately result in less revenue, affecting profitability.
Additionally, a reduced MAU count could mean that influencers relying on post engagement through the platform are far less likely to garner followers or engage with newfound audiences unless they branch out into other forms of content creation such as podcasts or affiliate marketing. As such, Twitter directly and indirectly faces implications related to their business model as they near or pass the breakeven target of 315 MAU.
Difficulty in competing with other social media platforms
The estimations of Twitter’s breakeven point suggest that it needs to attract at least 300 million active users to be profitable — a tall order. Although Twitter currently has over 330 million active users, the difficulty in competing with other social media platforms like Facebook and Instagram, which have over 2 billion and 1 billion active users respectively indicate that continuing growth is increasingly challenging.
Since 2017 when it first surpassed the 300 million mark, Twitter’s user base has been increasing slower than before. Furthermore, its user base in many regions outside the US has recently plateaued or even decreased. This showcases the difficulty in adding new users, especially given its current saturation across many countries worldwide.
Twitter’s need for more active users is further challenged by its inability to effectively monetize its existing user base due to difficulties in targeting ads through keyword searches and lack of access to detailed user behaviour data such as who is viewing each tweet or clicking on each link. As a result of these issues, only 10 percent of advertising spending goes towards social networks like Twitter instead of larger sites like Facebook which takes most (77 percent) of digital ad spending.
Overall, the current estimates for Twitter’s breakeven point highlight how difficult it will be for the company to reach profitability without expanding their user base exponentially first — a daunting task considering their reputation as one of the smaller social media networks along with their relative stagnation within many target markets around the globe.
