Twitter is now ever-present. It is almost, without fail, the first place that breaks news of any kind - whether international, national, local or hyper local, it is Twitter that has the news first. Many tweets, in turn, evolve quickly into debates, trend instantly into the top 10 topics of any given day, and sometimes cause numerous other streams of media interest to develop.
The Twitterati are bountiful in their devotion to tweeting, and numerous celebrities hire Twitter writers to fill their tweet buckets (sometimes they even post tweets themselves). Twitter is huge; Twitter is enormous; Twitter is everywhere; Twitter must clearly be pulling in huge revenue streams.
OK, hold on!
We've perhaps gone too far. Is Twitter pulling in huge revenue streams? It depends on how you choose to view Twitter.
We ourselves view Twitter as a successful small business that is slowly pushing its way to low-end larger business status, but nevertheless it is an SMB to us. Overall revenue is believed to be sitting at just under $600 million - certainly far above the $80 million or so in revenue generally required to consider an IPO. What about net income? Twitter's financials remain private, but we do know that the company "might be" profitable. Or not.
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We also know that the company has raised over $1 billion in funding - much of it in the secondary markets for trading shares of privately held companies. What this means is that a few very large investors likely hold most of the Twitter shares as a lot of that funding went into buying out early investors and a variety of employees who took early cash and ran with it. BlackRock is one of these investors and rumor has it (per the Wall Street Journal) that they have an initial valuation for Twitter of roughly $9 billion.
This secondary investment market evolved out of the recently passed federal program dubbed the Jumpstart Our Business Startups Act, or JOBS Act. Created to hopefully drive corporate and economic growth following the financial crisis, JOBS lets certain types of U.S. companies referred to as emerging growth companies with revenue of less than $1 billion (clearly Twitter fits this definition) to file initial and less rigorous IPO paperwork confidentially with the SEC, so that only regulators at the SEC can see it.
JOBS also makes it easy for such companies to step away from IPOs if market conditions prove unfavorable to a launch. In fact such companies do not need to release information publically until there are only 21 days left prior to hitting the trail for the "IPO roadshow." JOBS is certainly advantageous for smaller companies but leaves those of us who aren't insider investments very much out of the information loop.
Nevertheless, those insider investors must be feeling good about Twitter operating in the public markets. The question is how good should we outsiders feel about it? Will the insiders take a lot of IPO money and then run as soon as they can? Will Goldman Sachs, which looks to be the lead underwriter, focus on gaining Twitter a maximum investment or on giving current shareholders maximum ROI?
What Twitter Numbers Really Matter?
There are certain things to consider about a Twitter IPO up front. First, the Twitterverse is estimated to have roughly 200 million total users. That is a far cry from Facebook and from LinkedIn. Further, there is the key question of just how many of these 200 million users are active users - and even further there are numerous types of active users. How many actively read their Twitter streams? How many only post tweets and never read other peoples' posts? How many lurk and/or only read posts and never post Tweet themselves?
In the ideal Twitter-a-Go-Go advertising world scenario you want extremely active eyeballs that take in all of the information that Twitter presents on a 24x7 basis. Both active posters and active readers are key to driving any real advertising revenue, and quite honestly we have absolutely no real idea of what these numbers look like. So far Twitter has only one advertising model - an ad service it refers to as "promoted tweets" - which, quite honestly, doesn't sound to us like a substantial advertising capability with long legs. It sounds short-legged to us.
Yes, there are lots of stats out there one can Google that speak to such things as record number of tweets per second, average tweets per second and on and on and on. But we don't know the really useful numbers on really active users that promoted tweets require in order to serve as valuable advertisements. There is no doubt anecdotal information that might be trackable based on those placing promoted tweets, but that is not a rigorous measure.
Would likely investors (both large and small) be turned off if they were to discover that, of those 200 million Twitter accounts, only, say, 15 million are active and proactive tweeters? Can we hope that lurkers who don't post but do actively read will prove to be an effective target for promoted tweets? We have absolutely no idea how to answer that question. We'll need those aggregated lurker stats (and that anecdotal info from the advertisers - who aren't necessarily interested in sharing any such details) to really know.
We'll know more once - or if - Twitter posts the IPO details, which can appear at any time between today and 21 days before a road show. Until then we have no real way to take the measure of Twitter's real IPO opportunity.
We do however have the opportunity to employ that highly scientific and highly accurate measure known as gut feelings and gut instincts to make some preliminary determinations. What can we say or ask here?
There are lots more such questions to consider in trying to determine if Twitter can indeed become a front line media advertising star, but we'll stop here.
It's a Very Positive IPO Market
There is one other key intangible to consider: the nature of the IPO market itself, which is something that is both constantly shifting and sometimes rather shifty. We are currently in a period where IPOs are doing quite well. 2013 has proved itself a quality vintage for IPOs.
What this means is that the mass market of investors is generally in a very good mood and ready to pour money into IPOs - which also means initial demand will be high and IPO prices will likely rise immediately following the launch. Without a doubt it is a perfect time for Twitter to step up to an IPO.
We have found over the years that whenever a company engenders good feelings among its users (as we noted above this is certainly the case with Twitter) and the general IPO vintage is well rated, that initial investments in IPOs will pay off. Unfortunately, it also means that the IPO will be very hard or impossible for small investors to get into early in the IPO.
Twitter creates exactly the sort of perfect storm scenario where the little investor buys at unsustainable short term peak prices while the "sophisticatos" who owned the shares in the first place or got in early in the IPO have all sold off and are simply waiting for the prices to come back down before they jump back in for the longer haul. Buyers, beware!
For the long term we believe that Twitter will prove to be a viable though probably modest success. We don't believe it will become a LinkedIn, which has seen massive stock price increases. It could and will in fact likely mimic Yelp, which means that Twitter will take some time to deliver on ROI but that eventually it will do so. If you buy high at IPO time don't feel tempted to sell off at a loss when shares go through an inevitable dip - that is exactly what the sophisticatos are sitting and waiting for.
Hold onto your investment and Twitter will eventually reward you.
TechZone360 Senior Editor
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