Twitter, Inc. (NYSE: TWTR) may have set a 140-character limit on tweets. But, the same cannot be said for its shares that soared 93 percent on its market debut on the New York Stock Exchange to touch a high of $50.09.
Investors pounced on the stock, which opened at $45.10 a share on its first day of trading, 73 percent above its initial offering price of $26. The opening price of $45.10 values Twitter at $31 billion versus its IPO price valuation of $18 billion.
At its IPO price of $26, Twitter is being valued at about 25 times its projected 2013 revenue of $638 million based on its current growth rate. The valuation is on the higher side for a company that hasn't registered a profit in 7 years of its existence. Peers, Facebook, Inc. (NASDAQ:FB) trade at about 16 times its projected 2013 revenue, and Google, Inc. (NASDAQ:GOOG) at about 7 times its net revenue.
Furthermore, Twitter is yet to show meaningful monetization of its international user base as 77 percent of its user base is international. International monetization is a key element of Twitter's growth strategy. International revenue for the 9 months ended Sept. 30 was 25 percent of overall revenue, up from 17 percent of revenue in the year-ago period.
Management is focused on growing international revenue and closing the gap with the U.S. Recent sales and marketing efforts have focused on countries such as Australia, Brazil, Canada, Japan and the U.K. The company plans to increase their international revenue by launching a self-service advertising program in select international markets.
From an advertiser's perspective, Google's intent graph and knowledge graph is the strongest offering in the industry as user attribution is clearly well defined. i.e. the user has explicitly expressed his or her intent in the search query, and Google then directs the user to the site, where the transaction happens.
On the other hand, when combined with Facebook's affinity graph and social graph, Facebook's interest graph! is also a compelling offering for spreading the word-of-mouth and building awareness. However, user-attribution is still problematic on Facebook.
"Twitter interest graph by itself is somewhat of a less differentiated offering considering Google, Yahoo, Facebook and Pinterest are also providing Interest Graphs on their users, however, the Open Sharing Platform, makes Twitter the best discoverability platform," Global Equities Research analyst Trip Chowdhry said in a client note.
That said, Yahoo's Flicker, Google's Picasa, Facebook Instagram are huge, when compared to Twitter's Twitpic. Twitter has a massive challenge upfront to compete and win against its rivals.
In addition, Twitter video ads has completely backfired. Since acquiring Vines, Twitter has been displaying "video ads"in Twitter feeds. Twitter's intent was to increase advertisement revenues on Twitter feeds as video ads have higher CPM's. However, 76 percent of 230 million MAU access Twitter through mobile.
"Our research Indicates that probably 60% to 70% of these mobile users are not on unlimited mobile data plans and since video ads on Twitter, take up a lot of bandwidth, the user quickly reach their mobile data plan limits. This has caused some users to reduce using Twitter," Chowdhry noted.
Also, the company does not provide a way for the user to turn-off the video ads in Twitter feeds. So, it needs to address the user backlash with its video ads.
Meanwhile, the shelf life of the Tweet continues to decrease, probably now it is 15 minutes, which is due to the combination of popularity of LinkedIn, Google +, Facebook, Tumblr, Pinterest and the emergence of mobile short messaging services like Whatsapp, SnapChat, SkypeIM and Apple iMessage. Twitter should develop a strategy to protect against the declining time spent on its site.
A Reuters-Ipsos poll last month showed that 36 percent of people who signed up for a Twitter account say they do not use it.
That said, I am not taking anything away! from Twi! tter and its growth opportunities.
Twitter is one of the world's leading social networks (232 million Monthly Active Users, including 53 million in the U.S.), allowing users to create, distribute, and discover content in real-time on the web and mobile devices.
"Twitter's scale and deeply engaged user base create valuable opportunities for advertisers to leverage the platform," Sterne Agee analyst Arvind Bhatia wrote in a note to clients.
Advertisers can communicate directly with their followers for free, or they can purchase Twitter's advertising services to reach a broader audience.
Twitter agreed to acquire MoPub in September 2013. MoPub is a mobile advertising exchange which Twitter plans to integrate with the Twitter advertising platform to allow real-time bidding so that advertisers can more easily automate and scale their ad purchases.
One of the key positives for Twitter is that it is already successful on mobile. Mobile is the primary driver for Twitter as 76 percent of the MAUs in the most recent quarter accessed Twitter via mobile. Additionally, over 70 percent of the advertising revenue was from mobile in the most recent quarter. The company believes that mobile users as a percentage of the total will continue to grow in the near term.
Though International exposure is currently the sore point for Twitter, it is also the biggest opportunity. In the most recent quarter, Twitter's advertising revenue per Timeline View was $2.58 (up 50 percent from last year) in the U.S. and $0.36 (up 112 percent) in the rest of the world, highlighting the potential monetization opportunity that exists in the rest of the world.
According to eMarketer, the worldwide digital advertising industry will be around $118 billion in 2013, up 13 percent. By 2017, this industry is expected to grow to $173 billion. Within this, the mobile advertising industry is expected to grow the fastest—CAGR of 48 percent from 2012-2017.
"Twitter, with its focus on mobile, finds itself w! ell posit! ioned to capture this strong growth trajectory of the industry," Bhatia said.
Twitter, the most anticipated initial public offering since Facebook, raised $1.8 billion by offering 70 million shares in the IPO. It also offers an option to buy another 10.5 million shares. If all shares are sold, the IPO will raise $2.09 billion, making it the biggest IPO for an Internet company since Facebook's $16 billion offering last year.
However, investors need to exercise some caution with respect to Twitter as they have high expectations from the company. If it fails to deliver, then the shares may head for a free fall (see what happened with Facebook).
At $45, I feel the stock is overvalued. As a result, I would wait for the prices to cool down (around $35) and watch couple of quarterly results get an idea where the company is heading forward and how far it is gaining momentum versus its bigger rivals.
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