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Twitter's New Advertising Policy: Stop Political Ads Next Month

On Oct. 30, Twitter Inc. (NYSE:TWTR) CEO Jack Dorsey announced in a series of tweets that the social media company will no longer be running political ads beginning on Nov. 22. The company plans to issue a final policy announcement on Nov. 15, in which it will include more details and exceptions, such as voter registration ads.

The announcement caused only a 1% drop in share price, as Twitter's political ad revenue is considered negligible (political ads account for around the same percentage of revenue as Facebook's do, no more than 0.5%). According to its 2018 transparency report, Twitter has less than 300 political advertising clients, compared to 130,000 total advertising clients, so although 86% of the social media company's revenue is indeed from ads, the vast majority of those ads are not for politicians.


The politics of banning politics

After announcing its controversial policy of not fact-checking political ads, Facebook Inc. (NASDAQ:FB) has been accused of being on the bankroll of the Trump administration. As a company accepts money from the Trump administration and Trump fan clubs for running political ads, it cannot deny this accusation. However, the broader implication here is that Facebook is biased toward the incumbent administration, which is debatable and cannot really be proven.

Ironically, while Facebook's decision to not unilaterally fact-check political ads has incurred accusations of bias toward the incumbent administration, Twitter is facing similar accusations for its decision to ban political ads altogether.

"We're well aware we're a small part of a much larger political advertising ecosystem. Some might argue our actions today could favor incumbents. But we have witnessed many social movements reach massive scale without any political advertising. I trust this will only grow," Dorsey tweeted in response to comments following the announcement claiming that the move was meant to silence Democrats.

On the other hand, according to Trump's campaign manager, Brad Parscale, "This is yet another attempt to silence conservatives, since Twitter knows President Trump has the most sophisticated online program ever."

These accusations assume that the decision to ban ads was politically motivated in the first place. However, it might be better to say that, like Facebook's decision to allow any ads regardless of truthfulness, Twitter's move is meant to be as anti-political as possible. This isn't a question of profit, as political ad revenue totaled 0.5% or less for the social media companies. Both decisions attempt to make a public exit of responsibility for political speech, though the big difference is that Twitter will no longer have the shadow of accepting political ad money hanging over its head.

Company outlook

According to analysts, the loss of political ads will not have much of an impact on Twitter's revenue. In fact, the notion of not having to compete with political ads may make Twitter a more appealing platform for those seeking to send out non-political ads for businesses, products and such.

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In its recent third-quarter earnings report issued on Oct. 24, Twitter posted revenue of $823.7 million and earnings per share of 17 cents, disappointing analyst expectations of $874 million in revenue and earnings of 20 cents per share. The announcement caused the stock to drop 20.8%.

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The company attributes these shortfalls to complicated issues with its ad targeting systems, which it has been trying to resolve

"We run an auction, and so advertisers decide how much to pay for the audience that they want to target with their ads. And the more that you know about what somebody might want to see, the more compelling an ad or the more relevant an ad you can show them," said Chief Financial Officer Ned Segal in an interview following the report.

According to Segal, Twitter is currently pursuing a period of investment so that it can grow its revenue. The company's expenses increased by 17% from the previous quarter, and it hired 300 new employees. The overhaul of its ad targeting system continues to cause issues, which Segal expects to cause headwinds throughout the fourth quarter.

Despite the increase in spending and ad difficulties, Twitter is nowhere near the financial danger zone. It has a cash-debt ratio of 2.29, an Altman-Z score of 5.4 and an operating margin of 12.51%. Its price-earnings is currently at 14.43, which beats 78.14% of competitors.

Given its strong financial standpoint and investment in growth, the recent selloff caused by the ad-targeting issues may present a rare buying opportunity once the company shows signs of resolving its advertising headwinds. Moreover, as tensions for the 2020 U.S. presidential election rachet up, the decision to stop posting political ads may prove a promising tailwind. Twitter is definitely a stock worth keeping an eye on.

Disclosure: Author owns no shares in any of the stocks mentioned.

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This article first appeared on GuruFocus.