Twitter: It can help overthrow dictators. But can it make money?

Sure, Twitter has great power and reach, but can it make money? Wall Streeters are concerned

By Associated Press, Published: November 6

NEW YORK — It can help overthrow dictators. But can it make money? Protesters famously used Twitter to organize during the Arab Spring three years ago. President Barack Obama announced his 2012 re-election victory using the short messaging service. Lady Gaga tweets. So does the pope. But for all its power and reach, Twitter gushes losses — $65 million in the third quarter, nearly three times more than it lost a year ago.As Wall Street analysts size up Twitter ahead of its first public stock sale this week, more than a few are expressing concern about the company’s lack of profits.

Those misgivings are echoed by average investors. Some 47 percent of Americans believe Twitter won’t be a good investment, according to a recent AP-CNBC poll.

Of course, a company’s pre-IPO losses are no indication its stock will do poorly. Amazon.com had big losses before it went public 16 years ago and still occasionally posts them. Yet its stock is up more than 18,000 percent since the IPO.

Even so, future Twitter shareholders poring over the company’s more than 200-page IPO document are being asked to take a leap of faith. The document never makes clear when the company will sell enough ads to stanch the red ink and deliver sustainable profits.

What’s Twitter’s sales pitch to potential investors?

“They’re taking you to the edge of a swamp and saying, ‘Someday, this is going to be paradise,’” says Anthony Catanach, a professor of accounting at Villanova University.

Pessimists who have gazed at that swamp believe Twitter is going public too soon but can’t resist exploiting a market in which investors are eager to look past losses as stock prices soar to record highs. Optimists refuse to believe a company that has turned itself into a worldwide water cooler in just seven years can’t make big money — at least someday.

“Twitter is in its infancy, and it’s a site a lot more people will go to,” says Michael Pachter, an analyst at Wedbush Securities. “They’ll figure out how to sell advertising.”

Many money managers seem to agree. In a reflection of high demand from them for the stock, Twitter on Monday said it expected to sell stock for as much as $25 per share in the IPO, up from its previous estimate of $20.

To the optimists, Twitter’s losses are expected, even welcome, as the company spends hundreds of millions of dollars to attract users and build an ad business.

Twitter, those who are bullish about the company point out, is allowing TV advertisers to grab the attention of people who are using Twitter to engage in running commentary on the shows they’re watching.

When the lights went out during the Super Bowl in February, for instance, Oreo-maker Mondelez tweeted a picture of the cookie with the caption, “You can still dunk in the dark.” People re-tweeted the ad 15,000 in a few hours.

Another example: Earlier this month, moments after New England quarterback Tom Brady was intercepted in a big game, the NFL sent its Twitter followers a video replay, preceded by an eight-second Verizon ad.

Debra Aho Williamson, an analyst at research firm eMarketer, sees plenty more opportunity for Twitter to shake up the ad world. She says Twitter is an ideal medium for targeting people with ads while they’re away from home because it’s mostly accessed by smartphones and other mobile devices.

Williamson muses about a future in which you tweet that you’re hungry for a particular snack, and Twitter, using the location service on your device, sends you a coupon and directs you to a store nearby.

Unfortunately, that’s not all that potential Twitter investors are left to muse over after studying the company’s IPO document. What companies are its biggest advertisers? The document doesn’t say. When does it hope to make profits? It’s not clear.

What we do know from the document raises questions about whether Twitter’s race to grow quickly is faltering. Twitter had 232 million users in September, up 6 percent from June. The number of people using Twitter had been growing at double-digit rates last year.

Another problem: Those 232 million users are just one-fifth of the 1.19 billion monthly users on Facebook, a big rival for social-media ad dollars.

Brian Wieser, an analyst at Pivotal Research Group, says investors shouldn’t be put off by Facebook comparisons. He says Twitter is a “niche” business, but one with potentially a bright future selling ads. He reckons the company is worth maybe $29 per share.

But even bulls like Wieser say Twitter is a gamble. Twitter is less developed than most companies going public, he says, and is therefore an investment perhaps better suited for a venture capitalist than a public investor.

“They have to invent the ad products. They have to evangelize to marketers,” he says. “They have to get advertisers to cut checks.”

As with any company in the early stages of building its business, investors should expect plenty of hiccups, and in surprising places.

Take Twitter’s supposed strength — all those users accessing it via smartphones. Skeptics say that because of the small screen, Twitter could easily alienate users as it tries to squeeze in more tweets from advertisers.

One thing Twitter pessimists can’t deny about the IPO: The timing seems perfect. The tech-heavy Nasdaq index is up 30 percent in 2013, and the stocks of plenty of unprofitable companies have soared.

Zynga, a maker of games played over the Internet, is losing money this year and is expected to do the same in 2014. Its stock is up 56 percent this year. Yelp, the user-generated review site, is a big money loser, too. Its stock has more than tripled.

“People get very excited about social media,” says Villanova’s Catanach. “The passionate user-base wants to invest.”

Twitter will need to be insanely profitable just to hit its valuation

By Brian Fung, Updated: November 7 at 11:29 am

If you’re considering whether Twitter is a good investment now that it’s officially on the stock exchange, it might help to look not only at what future opportunities might hold, but also what it will take to get there.

Trading on Twitter has just begun, with an initial share price of $45.10 and a valuation of over $25 billion.
So far, the morning has been a huge success on the one hand for Twitter, which set its IPO price at $26 a share on Wednesday night. On the other hand, it’s indicative of how much farther the company will need to climb in order to justify its IPO. Dartmouth economist Anant Sundaram puts it this way to the Wall Street Journal:

For example, to get to even a valuation of $8 billion, Twitter will need to grow its revenues at a compounded growth rate of nearly 30% per year for the next ten years.

That’s pretty ambitious. But given that Twitter’s current valuation is now so much higher, Twitter would need to perform ridiculously well over the same time frame to fulfill what investors see as its potential. Along the way, it will still have to deter potential rivals, develop a more innovative business model, grow its user base (which, in the United States, is still remarkably small) and fend off the worst threat to its long-term prospects: age. Will Twitter still even be cool in 10 years?

 

Twitter’s genius: Five things that made it worth billions

By Matt McFarland, Updated: November 7 at 11:12 am

Curious why a company that has never turned a profit opened for trading Thursday at $45.10 a share and with a valuation of $31.3 billion? We explain the ideas that helped it gain 232 million active users:

Twitter embraced streams, not Web pages.

No one enjoys waiting for a Web page to load. By using a stream, in which users scroll down to read more tweets, Twitter created a more enjoyable experience.

“Stream-based content naturally flows across different devices and media, from tiny phones to tablets to giant desktop monitors,” wrote Anil Dash in a smart essay on the subject.

Twitter’s stream is a bottomless pit of topics you care about. While traditional media companies such as newspapers and television networks create the same product for everyone, Twitter is tailored to your interests. And it is as useful on a smartphone as a laptop or desktop computer.

The strict 140-character limit.

You can ramble on as long as you want on most Web sites. Twitter’s users must edit their thoughts and get to the point. As attention spans keep getting shorter and we have more and more stories, photos and videos to choose from, Twitter’s emphasis on brevity is refreshing and appealing.

A platform for others to innovate on.

Some of Twitter’s most popular features — replies, retweets and hashtags — were started by users, not company employees.

When a company can get an outsider to contribute a brilliant addition for free, that’s a great situation. Twitter’s employees didn’t need to have all the great ideas required to make their company a success.

Becoming ground zero for breaking news.

As a major news event unfolds, there’s no better place to be than Twitter. The information isn’t always perfect, but there’s no rival for the immediacy.

The plane that landed on the Hudson River is a classic example, as is the man who tweeted about the raid that killed Bin Laden, as it happened:

http://twitpic.com/135xa – There’s a plane in the Hudson. I’m on the ferry going to pick up the people. Crazy.

— Jānis Krūms (@jkrums) January 15, 2009

 

Twitter opens at $45.10 a share, valued at more than $25B

By Hayley Tsukayama, Published: November 7 | Updated: Friday, November 8, 12:42 AM

Twitter opened its first day on the stock market at more than $45 per share late Thursday morning, 73 percent higher than the $26 per share the company had priced for its initial public offering the evening before.

With trading underway, the social media company, listed as TWTR, is now has a market capitalization of just under $25 billion. After initially spiking to more than $50 per share, trading settled to around $45.30 before noon. The company had originally forecast that it would price its shares between $17 and $20, then later raised its estimate to between $23 and $25 per share.

Twitter, which got its start seven years ago, has seen strong interest in its stock despite the fact that it has never turned a profit. But initial trading, at least, shows that the company may have been too conservative with its pricing and may have left money on the table.

Prominent Twitter users were on hand to ring the opening bell: actor Patrick Stewart, 9-year-old lemonade stand owner Vivienne Harr and a representative from the Boston Police Department.

“@Twitter owes success to its users, so gives #NYSEBell to @SirPatrickStew, @VivienneHarr & @Bostonpolice,” the company said in a message just ahead of the market’s open.

That was followed by a simple tweet to mark Twitter’s first day as a publicly traded company: “#Ring!”

Earlier in the morning, company employees gathered for a watch party at Twitter’s headquarters in downtown San Francisco. The social network was flooded with photos from dozens of employees donning matching T-shirts with the firm’s blue bird logo.

Shares for Twitter did not start trading until a little before 11 a.m.

The social media company offered 70 million shares priced at $26 each, which it had announced late Wednesday, giving the firm a valuation of just over $18 billion before opening bell. It is the largest technology public offering since Facebook began trading on the public market last May and is primed to be the second-largest tech IPO in history.

Twitter’s stock market debut is a milestone, a test and a mandate to show it can turn its pull in the social media world into advertising revenue. Financial analysts said they expected to see a good first-day pop off the shares — an indication that there is high enthusiasm for the stock.

Twitter was on pace to raise at least $1.8 billion with its offering Thursday. During an interview on CNBC after the opening bell, Twitter chief executive Dick Costolo said the company would pour the money back into the social networking site to produce more effective advertising products and encourage growth.

“It’s all about amplifying the existing characteristics of the platform,” Costolo said. He mentioned Twitter TV and the firm’s push to bring “unique regional content into the platform.” Costolo also said that its mobile platform is Twitter’s “primary source of total revenue,” at 70 percent.

Costolo, as well as several other top Twitter executives and insiders, stand to make the most money off the share pop. Costolo himself has over 7.6 million shares of the company, giving his stake in the firm a value or $346 million at the opening price.

The company stake of Twitter co-founders Jack Dorsey and Ev Williams have now both topped $1 billion. Williams, the only person initially expected to make more than $1 billion off the offering, saw his 56 million shares of the company climb to a value of $2.6 billion. Dorsey, now the company’s chairman and the author of the firm’s first message in 2006, saw his stake in the firm rise to $1.1 billion.

The deal’s underwriters, led by Goldman Sachs, are also logging a major payday off the deal. Under the terms of the company’s final prospectus, the banks will be paid 3.25 percent of the amount raised by the IPO — about $59.2 million, based on the early trading numbers.

Twitter had also allocated 5 percent of shares to its underwriters based on performance. The company’s final prospectus shows that Morgan Stanley, J.P. Morgan, Bank of America- Merrill Lynch and Deustche Bank AG all picked up more shares than originally expected.

Although it’s not uncommon for tech firms to appear promising based solely on projections for revenue growth, some analysts have advised retail investors — many of whom were burned in Facebook’s public offering — to leave the first rush of trading to financial professionals.

But overall, analysts are upbeat on the firm’s prospects. In a note late Wednesday, RBC Capital Markets analyst Mark Mahaney said the firm shows the potential to become an invaluable part of the Internet landscape.

“Just as Google, Amazon & Facebook have become Internet utilities, so too may Twitter,” Mahaney wrote. “Twitter is where events, information, ideas, & fads get reported, purported, distributed, and exploited.”

For the New York Stock Exchange, the IPO is a high-pressure test of its ability to process the flood of trades that will come in for the new stock — particularly in light of how badly technical glitches marred Facebook’s public offering on the Nasdaq Stock Market last year. Those problems led to a $10 million fine for Nasdaq from the Securities and Exchange Commission.

To head off some potential problems, the New York Stock Exchange held a dress rehearsal of the initial public offering in late October to ensure that it could handle the volume of trades expected for the stock. On the live-stream video of the bell-ringing posted by the NYSE, officials could be heard saying that the there was no fixed time for the stock to begin trading, only that it would happen when it was “ready.”

(Jeffrey P. Bezos, who owns The Washington Post, was an early investor in Twitter.)

Related stories: Twitter IPO: Buzz builds over risks and (possible) rewards The Switch: Not that many Americans use Twitter, apparently Timeline of Twitter’s IPO: From humble beginnings to a company with a $18 billion valuation Photos: Who are Twitter’s major shareholders? Follow The Post’s new tech blog, The Switch, where technology and policy connect.