Twitter’s IPO prospects in 4,408 characters
Published: Tuesday, October 8, 2013
Updated: Tuesday, October 8, 2013 22:10
In a move that everyone saw coming, Twitter has applied for their IPO. The company filed back in July, but it took advantage of the 2012 Jumpstart Our Business Startups (JOBS) Act, which changed the rules for small companies with less than $1 billion in revenue. These companies are allowed to keep their draft filings confidential and aren’t required to share data with investors during the drafting process. Once the filing is complete, it needs to be made public at least 21 days before the company starts pitching to investors. Twitter’s data was released last week and its numbers make it an intriguing prospect.
One of the clear takeaways from the filing was Twitter’s expected growth. Revenue nearly tripled in the second quarter of 2013. The company is expected to bring in $582.8 million in 2013, and then close to $1 billion the year after. And with around 218 million active users sending out 500 million tweets per day, Twitter is an unquestionable force on the Internet. However, it is still questionable as a business.
Most notably, Twitter is losing money and has been for the past three years. Despite increases in revenue, the company posted a loss of $69.3 million in the first half of this year, which is up 40 percent from the same period in 2012. Twitter is sitting on a stack of $350 million in cash and liquid assets so there shouldn’t be a fear of long-term debt, but it is worrying that they are going into their IPO without being profitable. Facebook, likely to be the measuring stick for Twitter’s IPO, had $1.1 billion in revenue and $302 million in profits in the quarter prior to going public, and it boasted 845 million monthly active users.
The hemorrhaging losses aren’t Twitter’s only problem. While it is projected for growth, Twitter has run into some issues with advertisements, their primary source of revenue. Starting last year, they have had quarterly decreases in ad rates, what they charge marketers per “ad engagement,” with a 46 percent drop in the most recent quarter. The company has said this has been intentional in order to get a greater volume of ads, but this strategy only works with a growing user base. Twitter’s user base grew 7 percent last quarter, and while that is positive growth, it has slowed compared to the previous three quarters where the growth rate was between 10 and 11 percent.
Despite its rather lukewarm numbers, Twitter has an advantage in its mobile presence. If current trends persist, mobile devices will continue to increase and with it the market for mobile advertisements, which is expected to almost double by 2015. Approximately 75 percent of Twitter users are utilizing the service on smartphones and tablets, and mobile ads already account for 65 percent of all the company’s ad revenue. These numbers will likely grow as the market for mobile continues to expand. Twitter also has the advantage of being incorporated into iOS making it automatically accessible on iPhones and iPads.
Compared to other big name social media stocks like Facebook and LinkedIn, Twitter seems to be relatively premature for an IPO. So why are they looking to raise $1 billion at a $10 billion evaluation now? Many of Twitter’s early investors likely plan on selling once the company goes public and reaping the benefits, and this is the ideal time in a climate where social media stock has been friendly to Wall Street. Facebook has recovered from its initial IPO dip and is now trading at about $50 per share, compared to an IPO price of $38. LinkedIn is currently trading at roughly five times its IPO price of $45.
Twitter likely also needs the money to fund future acquisitions. Having lost out to Facebook in buying Instagram, Twitter bought Vine and brought video capabilities to its social network. Twitter dominates text, but it also needs to compete with the increase in video and photo content, an area currently dominated by Instagram and newcomer Snapchat. Incorporating new content and adding new services, whether it is through research and development or acquisitions, will require capital.
There is definitely room for multiple successful social networks, and there is no doubt that Twitter will still be here for years to come. However, until it is able to more effectively monetize its service, there is inherent risk buying Twitter stock, and buying into the initial hype could get you burned just like the Facebook IPO.