Twitter Tweets: We’re Planning An IPO

WASHINGTON, DC — According to the Journal, Twitter could go public as early as this year. With LinkedIn shares rising more than 150% since the company went public in 2011 and Facebook‘s (NASDAQ: FB.US) shares now trading above their IPO price last year, it’s an excellent time for the company to go public. But will Twitter be an excellent investment? Probably not — or at least not until it proves itself.

So, at this point, there’s still very little investors know about Twitter’s financials — except that the company has less than $1 billion in annual revenue. But this fact is no surprise. According to estimates from eMarketer, Twitter will earn $582.8 million in global ad revenue this year.

Twitter’s IPO

When Twitter filed to go public, it took advantage of the new Jumpstart Our Business Startups Act, or JOBS Act. The Act allows a company to initially file IPO paperwork confidentially. One of the requirements is that the company must have less than $1 billion in annual revenue.

Beyond the current excitement for social networking stocks like Facebook and LinkedIn, Twitter’s recent growth should paint a nice backdrop for an IPO, too. If eMarketer’s estimates are correct, Twitter will have bragging rights to some impressive growth metrics. eMarketer estimates that Twitter’s 2013 revenue will more than double its 2012 revenue. Even more, eMarketer estimates that 53% of Twitter’s ad revenue “will come from mobile this year, up from virtually no ad revenue form mobile in 2011.”

Fortunately, we’ll eventually get more details. According to the Journal, the JOBS Act stipulates that companies must make their filing public 21 days before they start actively shopping the IPO to investors in order to price the deal.

Looming uncertainties

The problem with young companies is that they’ve had little time to prove their enduring characteristics — especially young companies right after their IPO. Of course, this doesn’t mean that investors should rule out every IPO; after some due diligence, investors may discover that even a young, recently IPO’d company may possess enduring characteristics that make the stock worth considering.

But, already, there are definite uncertainties looming over the stock. Here are three big ones:

Twitter only has 200 million monthly active users

According to the company’s last progress update on its size, the company reported 200 million monthly active users (MAUs). I say only because that’s just 50 million more than one of its competitors: Facebook’s Instagram. Sure, Instagram is a photo-sharing app. But the lines between Instagram and Twitter are beginning to blur. And to make competition even tougher, Instagram just told the Journal that it plans to begin selling ads on its platform within the year.

Even more, 200 million MAUs is paltry number compared to Facebook’s 1.15 billion MAUs. And what about Twitter’s daily active users, or DAUs? Facebook boasts a whopping 699 million DAUs. Sure, Twitter benefits from a network effect. But Facebook’s 699 million DAUs is definitely a threat to the microblogging site.

Facebook is adding Twitter-like features

Media and press tools for surfacing conversations, hashtags, and “trending” notifications — Facebook is actively implementing new features to become more like Twitter. Questions loom: How far will Facebook go in its effort to implement Twitter-like features? Could Facebook undermine Twitter’s network effect?

A lofty valuation

Based on a private equity sale of Twitter stock to BlackRock earlier this year, Twitter was valued at $9 billion, according to the Journal. If Twitter does post revenue this year in line with eMarketer’s estimates, that would put a price-to-sales ratio of 15.4 on Twitter. In this rosy market, however, Twitter may likely IPO at a much larger valuation than $9 billion. If it does IPO at premium to its $9 billion valuation, it’s going to be one very expensive stock. Already, Twitter’s private equity valuation prices the stock (based on eMarkter’s revenue estimates) at 15.5 — close to Facebook’s current valuation of 18.4 times sales.

Twitter must prove itself

It’s far too early to guess what valuation Twitter will IPO at, but a simple look at some of the challenges Twitter faces makes a poor case for the company’s durability. Even more, in order for the company’s likely lofty valuation to make sense, it must possess enduring characteristics that can support years of impressive growth.

Maybe the company will make a great investment at some point in the future. Or maybe the S-1 filings will have some surprising and convincing data that make the stock a buy right off the bat. But for now, Twitter must prove itself.

I love Twitter. But I doubt I’ll love the IPO.

What about you? Are you looking forward to Twitter’s IPO? Do you think it will make a great investment?

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> Daniel does not own shares in any of the companies mentioned.