Many critics are claiming that Twitter's (NYSE:TWTR) current market valuation of $22 billion is far too high. In light of the fact that the company saw a near 73% increase in share price during its first day being publicly traded , the prevailing mantra is that Twitter is overvalued. Newspapers and blogs are disseminating this mindset left and right, but in the wake of such negative publicity it seems as though Twitter's upside has been forgotten.
One reason many investors consider Twitter a bad investment is because the organization has posted consistent losses and projects losses for the foreseeable future. When compared to peers like Facebook (NASDAQ:FB) or LinkedIn (NYSE:LNKD.DL), Twitter is behind the curve in terms of financial position for its age. Currently, Twitter is seven years old. It took Facebook only five years to first turn its first profit and it took LinkedIn just four. Furthermore, both companies were first movers in a now-crowded space.
Twitter's net losses, however, are largely due to heavy investment in research & development (R&D). In the first half of this year alone, the company spent $111 million on R&D, more than 44% of the revenue generated during this time . This means one of two things: Either Twitter does not have a sustainable competitive advantage, or it is crafting new features that will enhance the company's already popular product. If the latter proves true, the company could be poised to see great growth.
Growth of smartphone usage
Consider Apple's recent introduction of the iPhone 5c. The mentality behind this product launch was to make inroads into a previously untapped market segment. Furthermore, other organizations like Samsung and Nokia are also crafting smartphones for low-end segments. Even the U.S. Government is setting up a program to distribute smartphones to the economically disadvantaged . As a result, more than 1.4 billion people now own smartphones worldwide, a 44% increase from last year .
This is great news for Twitter investors. As smartphones become more ubiquitous, Twitter can expect to see a rapid increase in monthly active users (MAUs). Currently, Twitter's monthly active user base stands at 230 million, a 39% increase over last year's numbers ; 76% of these users accessed the site via some mobile platform .
This is largely due to the fact that Twitter is optimized for mobile devices. In today's world, people want information quickly and they want it delivered to them in a succinct format. Twitter offers this in spades. By forcing users to condense thoughts to 140 characters, the company ensures that only the content most meaningful and relevant to an intended idea is displayed.
As Twitter's monthly active user count continues to increase, the company can expect its revenue to do the same. Right now, Twitter is currently making $1.80 per user by selling ads and it increased its revenue by 106% since last year . This growth is likely to continue as the company attracts more and more users.
Why you should invest
Ultimately, Twitter has the potential to grow at a quick rate. If it can decrease its spending on R&D, it will be poised to start turning profits. As smartphone usage becomes more prevalent, Twitter usage will increase, and advertising revenues will go up. Likewise, profits will continue to expand as Twitter adapts and proves its concept. In the midst of negative publicity, this upside shouldn't be forgotten.
Fool contributor Scott Inderbitzen 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.