Make no mistake: Twitter’s installed base of 215 million monthly active users is a powerful advantage. And gone are the days when Twitter was simply used by self-interested navel gazers. These days, Twitter serves as a vital source for information, commentary, and breaking news.
Here’s the challenge: Twitter must build an even deeper platform that keeps users engaged, enhances the amount of time spent on the site, and generates meaningful revenue per user. To help in that effort, Twitter hired Jennifer Price in August. She was the former head of media sales at Google Inc (NASDAQ:GOOG) and is expected to help extend the appeal of the platform to TV advertisers and video game users.
As noted earlier, Twitter’s deal may be priced at around $13 billion and could open for trading at $20 billion. Let’s plug those numbers in and see how they compare with other hot dot-com stocks.
Simply looking at likely 2013 results for Twitter, this stock would be even more richly valued than the market’s current most expensive group of dot-com stocks. To be fair, all of these companies are likely to post excellent sales growth in 2014 and 2015, but as I noted earlier this month, it’s unclear if these companies will ever deliver the bottom-line results to justify their current valuations.
What To Look For
None of these issues will matter when Twitter launches its much-heralded IPO. An all-star line-up of investment banks are getting a piece of the deal, and they’ll be doling out shares to revered clients like Willy Wonka at his chocolate factory. As Twitter is quite likely to do several additional stock offerings over the next year or two, the investment banks are going to be sure that their analysts have very nice things to say once the research reports start to flow.
Yet there’s a very good chance that Twitter is not going to be able to live up to the analysts’ very lofty expectations, and as we saw with Facebook, the IPO could quickly lose steam as the days and weeks pass by. Extending the Facebook analogy further, shares of Twitter are likely to be much more appealing once the story has lost its IPO glow.
Risks to Consider: As an upside risk, analysts may develop extremely high target prices just so they can garner a great deal of buzz for their firm’s future banking efforts with Twitter.
Action to Take –> You’ll be hearing a lot of analogies between Facebook and Twitter in coming weeks, but you should ignore them. Facebook has steadied itself and cultivated a clear and far-reaching growth strategy. At this point, Twitter just needs to find a way to get to break-even. The company will need to come up with a range of new revenue streams from its current platform before it can become hugely profitable.
This article was originally written by David Sterman and posted on StreetAuthority.
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