As of July 2023, Twitter is officially dead.
To be clear, the bird app is still around, it was just re-branded as “X.” The Motley Fool believes this is the beginning of the end for the once mighty social media app and it has an emerging “Death of Twitter” Stock that we should be buying instead.
The Teaser
The number of people who use some form of social media currently stands at just under 5 billion and growing by the day, making the medium one of the most lucrative industries in the world.
Motley Fool Canada is an offshoot of the online financial advisory service that has grown out of an investment newsletter started in 1993. We have revealed some Foolish stock picks here in the past, including the “Tesla of Canada” and their Crypto Dark Horse pick.
I have fond memories of using the beta version of Twitter in early 2007.
Those were the wild west days before the political division and government-imposed censorship.
But in truth, the platform has changed a lot even before the past few years.
The Decline of Twitter?
Mainstream media has seemingly been beating the drumbeat of death about Twitter ever since Elon Musk took over the company last October. But most of the data I've seen paints a different picture.
The platform's number of monthly users recently reached 530 million for the first time and it now has 237 million monetizable daily active users (mDAU), also up.
Remember the 5 billion social media users figure I cited earlier? Well, they (we) helped platforms like Twitter and Facebook generate $67 billion in advertising revenue in 2022 alone. Another record-high figure.
However, both Twitter and Meta's (Facebook) ad revenue dipped last year.
This, along with the launch of Meta's X-like platform, Threads, has some like the Motley Fool thinking the app formerly known as Twitter may have peaked.
Luckily for us, there’s a third company emerging on the scene that the Fool thinks could offer far greater returns to growth-hungry investors.
The Pitch
Clicking the button on the teaser takes us to the homepage of the Motley Fool Stock Advisor Canada, so the pitch here is for a one-year membership.
Normally, Stock Advisor Canada costs $299 per year. But for a limited time, we can get two full years and pay only $179. The offer includes a bundle of reports, like The Final Piece of the Puzzle: The Canadian Investor's Guide to the Artificial Intelligence Revolution and 5 TSX Stocks to Soar in 2023 and Beyond, as well as monthly stock picks and a 30-day money-back guarantee.
The Search for Social Media Alternatives
Like many new industries at their inception, social media has evolved and gone through several different phases.
Online means of communication
The first phase, besides the telegraph machine itself, was instant messaging services in the late 90s and early 2000s.
These were the days of AOL instant messenger, ICQ, and MSN.
For many, including yours truly. They were the first internet services anyone used. Ah to be young and not know how to meme.
Profile Sharing and Networking
What followed was the likes of Friendster in 2001 (the original social network) and MySpace in 2003.
At the time, these were nothing short of revolutionary. The ability to build and customize your profile, add music to it, and chat with your friends all from the same platform was mind-blowing.
To a great extent, today's social media powerhouses like Facebook (launched in 2004) and Twitter (founded in 2006) are an extension of these early pioneers. With a lot of the same functionality.
Specialized Platforms and Decentralized Social Media
The rise in popularity of social media and the birth of data-prying, privacy-invading “Big Tech” as a result, has led many to search for alternatives to today's coterie of social apps.
Specialized, decentralized, open-source platforms may be the next big thing.
These enable us to enjoy all of the features of today's platforms, without sharing our private data or logging into a centralized server that tracks our every click.
This is where the Motley Fool's pick comes in.
While Meta and Twitter have seen advertising declines in the last year, this dark horse experienced year-over-year revenue growth of 22% in 2022. Most importantly, it’s also wildly profitable! Let's find out what it is.
Revealing the Motley Fool's “Death of Twitter” Stock
The clues we are provided are pretty generic:
- A small Canadian company is leveraging its massive audience to go after advertising dollars from a different angle.
- This underdog’s market cap is over 10,000 times smaller than Meta, but it already has over 113.6 million monthly active users (MAUs), putting it in the top 20 platforms by MAU in all of North America.
- We can almost guarantee you’ve never heard this company’s name before.
I can't be 100% sure given the truncated clues, but this sounds like VerticalScope Holdings Inc. (TSX: FORA). This is why I think so:
- VerticalScope is a $90 million market cap, Toronto-based technology company, that is applying a roll-up model to online digital communities.
- Combined, its communities and sites have more than 100 million monthly active users (MAUs). Putting it in the top 10 or so social media sites by MAU as a network.
- I had never heard of VerticalScope before, but some of the sites it owns like RedFlagDeals and Guitars101, may be familiar.
Sleeper Stock or Value Trap?
VerticalScope is no Twitter (X) killer, but as a fan of conglomerates whose sum of parts may be worth more than the whole, I have a soft spot for the stock.
But what do the financials say?
The company generates around $60-$80 million in annual revenue, with 20% being converted to free cash flow before non-cash expenses such as depreciation, amortization, and share-based compensation. So “wildly profitable” is a bit of a stretch. There are also some causes for concern.
First, the company's total debt stands at $65 million as of the end of Q1 2023 due to all the acquisitions it has been making. Although only a small portion ($4 million) is current debt and the company has enough cash on hand to cover it twice over, more and more of the long-term portion will become current over time.
Second, MAUs in Q1 were down 11% compared to last year due to declining search traffic. This may be nothing or it may be something, as search-related traffic is very volatile by nature. Something to keep an eye on going forward.
In closing, VerticalScope's business model of owning niche online communities is sound…so long as it doesn't employ too much leverage to pull it off and it keeps costs down, which it appears committed to doing as per its completed corporate restructuring this past February.
The digital holding company's revenue and earnings should continue to appreciate over the long term, as it acquires more online communities and it reaps the cost-savings of its aforementioned restructuring. A small bet at the currently prevailing market price should pay off.
Quick Recap & Conclusion
- The Motley Fool is teasing a “Death of Twitter” Stock that would profit big off the demise of the beloved former bird app.
- Meta and Twitter's (now known as X) high-growth days may be behind them and a third company emerging on the scene could offer far greater returns to growth-hungry investors.
- The name of this company is revealed only to subscribers of Motley Fool Stock Advisor Canada. For a limited time, we can get two full years for $179, which includes a bundle of extras and a 30-day money-back guarantee.
- You can skip this step, as we were given just enough clues to reveal the pick here for free as VerticalScope Holdings Inc. (TSX: FORA).
- VerticalScope is rolling up niche online communities which advertisers traditionally spend more money on than generic mass-market sites. Its market valuation will likely suffer from the traditional hold co. discount, but there is value to be found here long term.
Can FORA stock regain its 2021 IPO highs? Let us know what you think in the comments.