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Twitter IPO will be hot but with risks

Twitter is set for one of the hottest stock offerings in years. Photo/ AFP

Twitter is set for one of the hottest stock offerings in years. Photo/ AFP

WASHINGTON, Sept 14 – Twitter is leveraging its phenomenal growth for one of the hottest stock offerings in years, but questions remain on its ability to sustain its breakneck pace of expansion.

While financial details of the popular messaging platform are not public, the private company research firm PrivCo estimates that Twitter generated $245 million in revenue in 2012, and predicts the figure will be $500 million in 2013.

This suggests a market value of some $15 billion for the initial public offering (IPO), PrivCo says, using a “conservative” pricing at 30 times its annual revenue.

“It’s not quite Facebook but it’s certainly the biggest thing since Facebook,” said Lou Kerner, founder of the Social Internet Fund, referring to the May 2012 IPO of the world’s biggest social network.

“Social media is very hot, with Facebook hitting an all-time high, and investors are looking for other ways to play that,” Kerner told AFP.

Kerner said Twitter will be in high demand because “it is well on its way to becoming one of a small number of ubiquitous platforms used by a majority of people on the planet.”

Underwriters may be cautious about pricing in the wake of Facebook’s debacle last year, which saw a drop of some 50 percent, Kerner said, but with Twitter’s growth, “$15 billion does not seem unreasonable.”

Kerner said Twitter has shown it is a powerful platform for a variety of forms of expression, and “tremendous” for marketing.

It is also “well-positioned to be the dominant second-stream platform,” for people watching television and using Twitter for feedback or to determine trends, he said.

While there are no guarantees Twitter will remain dominant, Kerner said the more it grows, the harder it will be to unseat.

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Nate Elliott, analyst at Forrester Research, said Twitter has “gotten a lot of traction from a relatively small group of online users.”

The San Francisco company says only there are more than 200 million active users, but some analysts say this figure is 500 million or more.

Elliott said however that Twitter has established itself as the place to be for what some refer to as “microblogging.”

“I don’t think there will be a microblogging challenger,” Elliott told AFP. “What we don’t know is if there will be another cool thing that will come along.”

Because it publishes no financial data, analysts have divergent estimates on its revenues.

The research firm eMarketer, for one, says Twitter is expected to earn $582.8 million in global ad revenue this year, and nearly $1 billion in 2014.

Twitter, which launched in 2006, opened the door to advertisers in 2010 by allowing marketers to insert paid “promoted tweets” into user feeds.

It began mobile ads in 2012 and allowed advertisers to target users based on their geographic location or whether they access the service using mobile devices or personal computers.

“A lot of people were worried whether they could insert marketing and advertising, and they were able to do that,” Elliott said. “But they have not yet cracked into other ad models.”

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Yet some analysts are cautious, especially in view of Twitter’s decision to delay the release of its finances.

Using the 2012 law allowing confidential IPO filings “is not good, considering that social media is all about openness and transparency,” said Trip Chowdhry at Global Equities Research.

“If your culture is based on openness, shouldn’t your IPO be based on that?”

On a fundamental basis, Chowdhry said Twitter may end up being wildly successful, “or it could be another Zynga or Groupon,” referring to the gaming company and daily deals firm, both of which have floundered since their IPOs.

“This is the peak for Twitter and social media,” Chowdhry told AFP. “In the Internet era, you rise fast and your fall fast.”

While Twitter appears to have gained a foothold in online advertising, Chowdhry said it was not clear if it can maintain its growth.

“Advertising spending remains the same, but it is getting redistributed among old media and new media, and among various properties” on the Internet, he noted.

Chowdhry said that in view of the Facebook fiasco, the Twitter IPO should be priced at a lower multiple, of just two times the company’s revenue.

“If revenue is $500 million, it should be (valued at) $1 billion,” he said. “The era of exponential growth is over.”

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And Chowdhry said that to learn the lesson from Facebook, “investors should do their homework.”

“Don’t depend on investment bankers or brokerage research, do your own homework. On Facebook, so many people got burned.”

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