A little bird might have told you that Twitter was planning an IPO. That bird might have, in fact, been Twitter itself. The news has sent the Internet and Wall Street into a mania that, if you regularly follow the market, might not be that surprising. Mr. Market is anything but emotionally stable, especially when it comes to hotly anticipated tech companies (lest we need reminding of the Facebook (NASDAQ:FB) IPO blitz).
While day traders and investment bankers foam at the mouth over Twitter's IPO news, the Foolish investor steps away from the flock to reflect and ask some important questions. What kind of hurdles could Twitter face as a public company? What might its financial guts look like? And could it become the kind of classic long-term stock investors love to hold? Let's size it up to try and get a better idea.
Public offering comparisons
After seeing many of its peers IPO before it, Twitter has the opportunity to learn from some of their mistakes. Research firm eMarketer has estimated Twitter's ad revenue to be $582.8 million, and the company currently reportedly has 240 million monthly active users (MAUs). Unlike Facebook, which had already raked in just over $4 billion, and was not far from 1 billion users when it went public in May 2012, Twitter has much more room to grow, and investors love that kind of potential.
While by no means identical, Twitter's smaller figures more closely resemble LinkedIn (NYSE:LNKD), at the time of its IPO, than Facebook. The corporate social media giant had only 131 million registered users, and $436.1 million in TTM revenue, upon going public in 2011, and since then has performed astoundingly well, trading at more than twice its IPO price, and earning 86% more in revenue in two years. Twitter has shown potential for that kind of growth. Starting (relatively) small with strong growth potential is a good first step for a soon-to-be public company.
Diversify, diversify, diversify
Twitter may be a promisingly sized company, but it still needs to put a lot of thought into a very important aspect of its business: how it generates revenue. Currently, the company acquires its earnings through advertising and sponsored tweets. That's certainly nothing to sneeze at, but a reliable multi-pronged approach to revenue is much more favorable for investors than a single monetary stream.
Here's where Twitter could take notes from LinkedIn and Facebook. These companies don't just profit off of advertisers, but also charge fees for developers (in Facebook's case), premium subscriptions, and job recruitment options (a la LinkedIn). For Twitter, however, branching out could prove to be a bit more difficult. The company is still, ultimately, a place where people go to read short clips about what's going on, and aren't looking for (or looking to provide, in a developer's case) any specific service.
That being said, Twitter is expected to bring in a huge amount of money through its mobile advertising within the next few years, a feat that threw Facebook for a loop for quite some time. eMarketer estimates that, by 2015, the company could bring in $1.33 billion in ads, and 60% of that will come from mobile. If it brought in that kind of money, the company could buy itself a little time to figure out how to better diversify its business.
Are tweets a good investment?
It's impossible to pinpoint how Twitter's stock will perform before the company even goes public. Once Twitter unveils more of its financials, it'll be easier to make a more pointed assessment. However, there's plenty of evidence to suggest the company has a shot at success, if it doesn't stick to being a one-trick (or one-tweet) pony. In the meantime, don't buy into Twitter fever; just try and keep as cool a head as possible.
Fool contributor Caroline Bennett has no position in any stocks mentioned. The Motley Fool recommends Facebook and LinkedIn. The Motley Fool owns shares of Facebook and LinkedIn. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.