The Twitter (NYSE: TWTR) IPO yesterday was everything it should have been: smooth and non-eventful. Everything that the IPO watchers expected happened, and nothing unexpected occurred. Basically, the IPO itself could not have gone any better.
But what about Twitter itself? Is it even worth the $44.90 per share it ended up closing at? That gives it a valuation of over $24 billion. Is it worth it? Right now . . . no.
Some Scary Facts About Twitter
Twitter currently concerns me in a few key areas.
First, it lost over $133 million in the first nine months of 2013. This isn't even a profitable company and it never has been. It's just burning through cash. Look back at Facebook (NASDAQ: FB) — it had roughly $1 billion in revenue when it when public. Granted, Twitter is a small company, but show me some profit!
Second, Twitter is still only one-fifth the size of Facebook, and it's in the social media space. Yes, Twitter is growing users rapidly, and it is expanding its ad revenue, but what will happen to this space in three years? Will Twitter even have enough runway to launch all the advertising systems it wants to put in place before its user growth slows? That's the tricky part of dealing with social media companies.
What Twitter Has Going for It
I love Twitter as a product. If you follow The College Investor, you know that I tweet and respond to conversations regularly. I check Twitter multiple times per day, and I prefer it for news compared to going to news websites. I love the fact that I can read it on Twitter first.
Twitter also showed that it knows what it's doing when it comes to being a public company. It handled the IPO well, it hired the right people to make it happen, and it set up the IPO in a way that minimizes the post-lockup period sell-off, reassuring regular investors that there won't be a huge sell-off later.
And Twitter does have great potential when it comes to building a targeted ad system. It has geolocation already in its system. It has a ton of celebrities and other big names on its platform. Most major brands already use Twitter. These are all good things for a company looking to grow revenue.
The Big “If”
How much can it really grow its advertising revenue? That's the big question. It is medium-sized when it comes to social media. The lifetime of a tweet is about six seconds on average. If you're a company that's going to pay for a sponsored tweet, your money goes a long way because the cost of advertising in such a way is cheap. That's tough for Twitter.
The only ways to scale the Twitter advertising model would be to get more users or to devise a system that makes advertising more worthwhile (i.e., pricier) so that Twitter can grow its revenues. User growth is happening, but not on the scale that Twitter needs to become a solidly profitable company.
So, the other part of the equation is increasing the value it receives from advertising. I don't see a clear path to success with this, and that's the big “if” when it comes to investing in Twitter.
What are your thoughts on Twitter as an investment? Can Twitter make it to profitability sooner rather than later?