November 6, 2013

Twitter's lack of profits gives analysts jitters

They express concern ahead of the company's IPO this week.

By Bernard Condon
The Associated Press

NEW YORK — It can help overthrow dictators. But can it make money?

click image to enlarge

Twitter’s San Francisco headquarters may be a sparkling sight, but at least so far there’s been no gold in those tweets. As Wall Street analysts size up Twitter ahead of its first public stock sale this week, more than a few are expressing concern about whether it’s a good gamble.

The Associated Press

Protesters famously used Twitter to organize during the Arab Spring three years ago. President Obama announced his 2012 re-election victory using the short messaging service. Lady Gaga tweets. So does the pope.

But for all its power and reach, Twitter gushes losses – $65 million in the third quarter, nearly three times more than it lost a year ago.

As Wall Street analysts size up Twitter ahead of its first public stock sale this week, more than a few are expressing concern about the company’s lack of profits.

Those misgivings are echoed by average investors. Some 47 percent of Americans believe Twitter won’t be a good investment, according to a recent AP-CNBC poll.

Of course, a company’s pre-IPO losses are no indication its stock will do poorly. Amazon.com had big losses before it went public 16 years ago and still occasionally posts them. Yet its stock is up more than 18,000 percent since the IPO.

Even so, future Twitter shareholders are being asked to take a leap of faith.

“They’re taking you to the edge of a swamp and saying, ‘Someday, this is going to be paradise,’ ” says Anthony Catanach, a professor of accounting at Villanova University.

Pessimists who have gazed at that swamp believe Twitter is going public too soon but can’t resist exploiting a market in which investors are eager to look past losses as stock prices soar to record highs. Optimists refuse to believe a company that has turned itself into a worldwide water cooler in just seven years can’t make big money – at least someday.

“Twitter is in its infancy, and it’s a site a lot more people will go to,” says Michael Pachter, an analyst at Wedbush Securities. “They’ll figure out how to sell advertising.”

Many money managers seem to agree. In a reflection of high demand from them for the stock, Twitter this week said it expected to sell stock for as much as $25 per share in the IPO, up from its previous estimate of $20.

To the optimists, Twitter’s losses are expected, even welcome, as the company spends hundreds of millions of dollars to attract users and build an ad business.

Twitter, those who are bullish about the company point out, is allowing TV advertisers to grab the attention of people who are using Twitter to engage in running commentary on the shows they’re watching.

When the lights went out during the Super Bowl in February, for instance, Oreo-maker Mondelez tweeted a picture of the cookie with the caption, “You can still dunk in the dark.” People re-tweeted the ad 15,000 in a few hours.

Another example: Earlier this month, moments after New England quarterback Tom Brady was intercepted in a big game, the NFL sent its Twitter followers a video replay, preceded by an 8-second Verizon ad.

Debra Aho Williamson, an analyst at research firm eMarketer, says Twitter is an ideal medium for targeting people with ads while they’re away from home because it’s mostly accessed by mobile devices.

Williamson muses about a future in which you tweet that you’re hungry for a particular snack, and Twitter, using the location service on your device, sends you a coupon and directs you to a store nearby.

Unfortunately, that’s not all that potential Twitter investors are left to muse over after studying the company’s IPO. What companies are its biggest advertisers? The document doesn’t say. When does it hope to make profits? It’s not clear.

What we do know from the document raises questions about whether Twitter’s race to grow quickly is faltering. Twitter had 232 million users in September, up 6 percent from June. The number of people using Twitter had been growing at double-digit rates last year.

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