Is Twitter A Good Investment? 11 Pros And Cons For Buying TWTR Shares

The final countdown has begun. Twitter will make its initial public offering on Thursday, listing on the New York Stock Exchange under the symbol TWTR and hoping to raise around $1.75 billion.

It’s the most-hyped IPO since the Facebook Inc. (NASDAQ:FB) flop in May 2012, and many are wondering if Twitter will suffer a similar fate. Some are even saying that Twitter recalls the IPOs from the dot-com era and are worried that a thriving tech space is leading investors to overlook flaws in Twitter’s business model.

On the one hand, many investors remain bullish on Twitter, especially on its ability to increase its user base and vastly expand its ability as an advertising platform.

It will be a little while before small investors will be able to purchase shares of Twitter, but that isn’t stopping people from wondering: Is Twitter a good investment? Here are some pros and cons about Twitter to consider before buying shares of TWTR.

Pros

1. Strong Demand

Following Twitter’s “roadshow” to pitch the value of the company to investors, Twitter increased the price of its shares from the $17 to $20 range to $23 to $25. Many have interpreted this to mean that demand for Twitter shares is very high, and that the IPO could do very well. Some have reported that Twitter closed orders on Tuesday, a full day earlier than expected.

2. Differences From The Facebook IPO

Closing the books early points to another positive about the Twitter IPO: It’s going very differently from the Facebook IPO. Demand for Facebook was also high, but Facebook decided to increase the number of shares it was selling rather than close its book, a move that proved to be too aggressive.

Twitter filed for an IPO in secret to avoid the same public speculation that Facebook attracted, and is listing with the NYSE instead of NASDAQ. Twitter even ran the first-ever IPO simulation on the NYSE a couple of weeks ago to be sure of avoiding the technical glitches that plagued Facebook’s IPO.

3. Bullish Tech Market

Tech companies, especially social networks, have done pretty well on Wall Street in 2013. Facebook finally recovered from its IPO letdown and Facebook stock finally overtook its initial price in August 2013. LinkedIn Corp. (NYSE:LNKD) has also had a good year.

In general, the IPO market in the U.S. has been booming this year. Some estimate that IPOs could generate as much as $34 billion in the next several months.

4. Rapid Growth

In its S-1 filing with the SEC, Twitter reported that sales rose 198 percent to $316.9 million compared to the year before. Ad revenue has shot up $221 million in the first six months of 2013, more than doubling ad revenue from the same period a year ago, and revenue from data services increased 53 percent to $32 million. At the same time, Twitter has decreased its net loss by 38 percent to $79.4 million.

5. Mobile Advertising Already In Place

One of the big concerns investors had with Facebook was that the social network wouldn’t be able to successfully adapt to mobile devices. Facebook proved them wrong and now generates 49 percent of total ad revenue from mobile devices.

Twitter, however, is in another league when it comes to mobile ads. Twitter was originally designed as a platform to broadcast status from SMS messages and has always been formatted for mobile devices. Twitter already generates 65 percent of its total advertising revenue from mobile ads, and Twitter has made several acquisitions to ensure that it can continue optimizing its mobile experience. Many marketers see Twitter as a much more efficient platform for targeted advertising, and this fact is not lost on investors.

CONS:

1. Valued Too Highly

Despite Twitter taking a conservative approach compared with Facebook, some analysts see Twitter’s $13.9 billion valuation as way too high relative to its sales. Brian Hamilton of Sageworks, a financial information company that specializes in analyzing private companies, said Twitter’s IPO value is 43 times its revenue from last year. For comparison, Facebook’s IPO value was 22 times sales, Apple’s was 10 times and Microsoft’s was four times. And all of those companies were profitable when their made their IPO, something Twitter had never been.

2. Twitter Has Never Made Money

Yep, you read that correctly. One of the most troubling things about the Twitter IPO is the fact that, despite soaring revenues, the company has never turned a profit. What’s worse is that its losses are growing. Even when revenue shot up to $253.6 million in the first half of 2013, Twitter lost $69 million, an increase from a loss of $49 million in the year-ago period.

3. User Base Growth Slowing Dramatically

Twitter depends on its user base growing to make more money for investors, but it isn’t clear that it can do that. In the most recent quarter, the amount of monthly active users on Twitter only grew by 7 percent, down from double-digit growth in previous quarters. This especially concerning for potential investors when considering that Twitter only has about 215 million MAUs to begin with. When Facebook made its IPO, the social network already had 845 million MAUs. According to Quartz, Twitter only generates an average of 55 cents per user, while Facebook generates an average of $1.41.

4. Decreasing Cost Per Ad Engagement

In its S-1 form, Twitter said the cost per ad engagement, the metric it uses to measure the value of advertisements on Twitter, fell for five consecutive quarters. In the second quarter of 2013, cost per ad engagement fell nearly 50 percent.

5. Potential Patent Infringement

Twitter has quietly submitted several drafts of its SEC filings, and the most recent version filed on Monday disclosed that IBM has accused Twitter of three counts of copyright infringement. One of these is related to online advertising. IBM has invited Twitter to settle, but Twitter said it believes it can defend against the claims. While it may not have a direct impact on the IPO, the claims could hurt the Twitter brand down the line, especially when considering that Twitter has, for the most part, stayed out of Silicon Valley patent disputes.

6. “Dark Pool” Of Users

While Twitter reports that it has 232 million active users, outside researchers have found nearly 651 million accounts that are inactive. These include abandoned accounts (a poll found that 36 percent of users never use Twitter after they sign up) and users that only read tweets but don’t engage. Twitter also has a problem with fake accounts and bots. None of this is good for advertisers, and are problems that Twitter needs to resolve.

Do you think the positives of the Twitter IPO will outweigh the negatives? Do you hope to purchase stock in Twitter? Let us know in the comments.