3 Reasons to Add Twitter, Inc. to Your Watchlist

Shares of Twitter (NYSE:TWTR) have fallen nearly 25% since the company's November 2013 IPO, and year to date shares are down more than 45%. Even so, the company is still valued at approximately $20 billion despite bringing in just $801 million in revenue over the past four quarters. There is little question that Twitter shares are priced at a premium, but companies with Twitter's network, vision, and extraordinary growth do not come along often.

 

Here are three reasons why Twitter is worth a second look and should be on your watchlist. 

 

This may be more important than you think. A study by the Boston Consulting Group (BCG) earlier this year found that the Millenial generation -- already accounting for $1.3 trillion in annual spending and projected to include 78 million people in the U.S. by 2030 -- is more engaged with companies and brands than any other generation and "expects their values to be reflected in the brands they purchase." Lara Kaslow, a marketing executive at BCG, says Millenials are "ushering in the end of consumer marketing as companies have long known it." These trends in business and marketing present a tremendous opportunity for Twitter moving forward.  

 

The long-term vision of Twitter is to become a "global town square"; a global platform supporting instant and unfiltered communication. CEO Dick Costolo explains how sales are approached at the company:

Twitter thrives as a stakeholder-driven company, especially when it comes to employee engagement. As CEO, Costolo receives a 95% employee approval rating and the company as a whole receives a 4.4/5 rating from employees. This year Twitter earned the second-highest employee ranking on Glassdoor of businesses with more than 1,000 employees. Indeed, based on employee engagement and rapid sales growth, Twitter is living up to its top value, "Grow our business in a way that makes us proud."

 

Twitter has expanded revenue at an average annual pace of 118.5% since 2010, with sales increasing 119% year over year in the first quarter of 2014 to $250 million. Average Monthly Active Users (MAUs) on Twitter now totals 255 million, with 78% of those users coming on mobile devices. 

 

Mobile marketing represents an especially massive opportunity for Twitter over the next several years. Twitter's advertising revenue -- 80% of which is generated through mobile -- increased 125% year-over-year in the first quarter of 2014. Gartner projects mobile marketing spending to reach $18 billion in 2014 and top $41 billion by 2017, representing annualized growth of more than 30%.

 

 

As a young and rapidly growing company, it isn't much of a surprise that Twitter is yet to produce much in the way of cash flow. I see this as one of the larger risks associated with investing in Twitter today, because the company is yet to prove whether the business itself can generate enough cash flow to finance rapid expansion. Still, there are some bright spots.

 

Over the past three fiscal years Twitter's operating cash flow production has improved from negative $70.6 million in 2011 to $1.4 million in 2013. In the first quarter of 2014 Twitter generated $42.7 million in operating cash flow, up markedly from $2.62 million in the same quarter in 2013. Twitter is still free cash flow negative, however, meaning the business requires more cash than it is producing on its own. 

 

After its IPO last year the company does have $2.2 billion in cash with $102.5 million in debt, so the business does have a bit of a cash cushion for the time being to finance expansion. For Twitter to be a worthwhile investment the company must improve cash flow production. So far the company's cash flow production is headed in the right direction. 

 

Like many investors, I have been quick to overlook Twitter post-IPO largely due to valuation concerns. The stock is certainly priced at a premium, but this isn't a surprise given the rapid sales growth seen at Twitter. Patient investors with a very strong stomach for volatility might want to open a small position to follow the ride or, at the very least, keep a close watch if the market continues to push Twitter shares downward. Rapid growth coupled with major trends in mobile advertising make Twitter worth watching very closely as the company works toward its vision of becoming a global town square.