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The Twitter IPO
The highly anticipated initial public offering of social networking site Twitter, Inc. (TWTR), which had been eagerly awaited by the investment community for months, has been completed. The company issued 70 million shares on November 7, 2013 at a price of $26.00 per share, valuing the firm at $18.2 billion in terms of market capitalization. The stock began trading on the New York Stock Exchange under the ticker symbol TWTR at $45.10 a share, more than 70% higher than its offering price. It closed its first day of trading at $44.90.
Twitter, which boasts over 200 million monthly active users, has become popular among the masses due to its microblogging platform, which allows members to publish posts consisting of 140 characters or less, called “tweets”. It’s a trend that has not only caught the attention of the general public, who can use the site to connect with their social circles in real time, but also of celebrities and corporations. Indeed, Twitter has become a platform for the dissemination of information on an incredibly wide scale, allowing the rich and famous to connect with their fan bases and companies to communicate with their customers and investors.
The company generates the majority of its revenue from advertisers, through the sale of its Promoted Products: Promoted Tweets, Promoted Accounts, and Promoted Trends. It expects the main top-line driver going forward to be advertising revenue generated on the company’s mobile platforms, which already accounts for about 70% of total ad sales. This is largely due to Twitter’s emphasis on the “on-the-go” approach, promoted by its user-friendly mobile applications.
As opposed to fellow social networking firm Facebook Inc. (FB), Twitter’s focus is on real time updates, which means users may be more active on the site throughout the day than on other sites. This augurs well for advertising revenue, as the company’s user base is still growing at a rapid rate. In fact, active users increased 39%, year over year, during the three months ended September 30, 2013. Meanwhile, advertising revenue more than doubled, to $153.4 million, over the same time frame.
That said, the company has yet to turn a profit. In fact, it has incurred steep operating losses since its inception. This is likely a result of the hefty investments Twitter has made in its technology platforms and infrastructure. And although revenues are likely to increase, growth will probably moderate in subsequent periods, while costs continue to rise. This may further hinder profitability for the foreseeable future.
Nevertheless, Twitter has an interesting business model, which lends itself better to long-term growth than many of its competitors, due to its ability to streamline the flow of information via the Web. There have been mixed reviews on Wall Street regarding the company’s prospects, but its unique position in the social networking space may well serve as a catapult for Twitter over the long haul, particularly if it manages to turn a profit in the next couple of years.
We advise investors to take a wait-and-see approach here, while awaiting Twitter’s introduction into The Value Line Investment Survey.
At the time of this article’s writing, the author did not have any positions in any of the companies mentioned.