Twitter has been “all the
rage” for the last six weeks as the company’s stock has soared more than 150%
since its initial public offering. Given that the stock has increased in value
so dramatically while still not generating any profits is both impressive and
scary. How should investors approach the company in 2014 if interested in the
stock?
Twitter had phenomenal
revenue growth from 2011 through 2012 when it jumped almost 200% to just under
$320 million. At the same time, the company’s losses increased by almost 40% to
$79 million. As of September 30, 2013, the company generated roughly $168.6
million in revenue but also ended up losing approximately $64.6 million. With
this in mind, what do investors see in this company?
Revenue from the company is
generated from two sources:
• Advertising
• Data licensing
Investors have to be jumping
on momentum presently. Short term, the company has grown from about $40 a share
at the end of November to just under $70 a share in early 2014. That is
remarkable growth in such a short period of time. But there is a reason why.
Mobile Advertising
Speculation
Twitter recently set a
record for the value of the stock three days in a row because of optimism that
the company could see greater growth in its mobile digital advertising. The
optimistic view of tech investors has helped the company derive a market cap of
close to $40 billion since its public offering.
So what are investors
betting on? Here you have a company that is not generating a profit but
investors are pouring money into it like white on rice. As companies look to
market their products through wireless services and ties with television
programming, investors believe Twitter is going to attract a lot more ad
dollars.
Unproven Revenue Stream
It is not surprising that
91% of Twitter’s revenue comes from advertising. It is common among social
media companies to have a bulk of their revenue coming from this particular
source.
Also common in the industry
is that advertisers do not have long-term commitments which makes long-term
“revenue stability” a hard task. One of the challenges that the investor has to
deal with is that the companies advertising agencies promote are selling an
“unproven” commodity.
There is nothing surprising
about this since Twitter just went public and advertising dollars need to
translate into revenue for the companies that are paying for advertising, or
things could fall apart for the Twitter very quickly. This is not a prediction
as much as a conservative approach to understanding corporate risk that Twitter
has.
The company’s other revenue
source, data licensing, is a mere 9% of revenue which actually dropped by 17%
from the second quarter. As total revenue increases, Twitter expects this
source to decrease (percentage wise.)
More money is going out than
is coming in and the company plans on spending more on research and development
which accounts for about 40% of its entire expense sheet. It appears Twitter is
going to be reliant on more and more advertising to cover its expenses.
This is what Investors
should be Aware of
Because revenue is growing
so quickly and the company continues to spend more to catch up, investors
believe there is a huge potential for the company to dominate a good portion of
mobile and TV advertising markets. Because of this speculation, common sense
investing is no longer applicable to Twitter. Valuation is irrelevant at this
point and speculation that Twitter will become the next great media monopoly
platform is why money is going into it right now.
A Sensible Approach to
Investing in Twitter
From a conservative
investing viewpoint, the stock is not worth the risk. But if someone is
interested in investing in the company, the stock should be considered a high
risk and highly speculative investment.
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Sign up for “The Mission Report” at www.MissionIR.com
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