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Coverage Initiation: Twitter
Value Line has initiated coverage of Twitter (TWTR) in its flagship product, The Value Line Investment Survey. Twitter has become a leader in social media, and its stock was one of the highest profile initial public offerings in 2013. According to Twitter, the company “strives to give everyone the power to create and share ideas and information instantly, without barriers.”
Twitter is used by people, companies, organizations, governments, and institutions to disseminate information (known as “tweets”) in short bursts that are limited to 140 characters. (Value Line’s account is twitter.com/valueline.) As of the 2013 yearend, Twitter had 241 million monthly active users, with some 500 million tweets sent per day. The company also provides Vine, a video product that allows users to post brief videos (no more than six seconds).
The company is headquartered in San Francisco and has offices in 10 other U.S. cities. The company has a strong international presence, with offices in 14 cities in 12 foreign countries, and has more than 2,300 employees worldwide. It supports more than 35 languages, and 77% of its accounts are outside the United States.
Twitter was founded in 2006 and incorporated in Delaware in 2007. The company had its initial public offering on the New York Stock Exchange on November 7, 2013 at $26 a share. The stock immediately soared to the mid-$40s, traded in a narrow range for the first four weeks, and subsequently rose some 50% before falling sharply after Twitter reported fourth-quarter results that disappointed Wall Street.
The social media site is growing rapidly. Year-to-year revenue growth was 116% in the fourth quarter of 2013, and 110% for the full year. The bottom line remained in the red, due primarily to high stock-based compensation expense.
Most of the company’s revenues come from advertising. Twitter offers such services as “promoted tweets,” “promoted accounts,” and “promoted trends.” For instance, an advertiser pays Twitter when a user engages with a promoted tweet. Twitter’s format enables advertisers to capitalize on live events and breaking news. The company’s growth is expected to come from new users, partnerships with traditional media, and enhancing the services and formats it offers to advertisers.
This stock is not for the risk-averse investor. Twitter does not have a long history, and its history as a public company is far shorter. The key question is, how does an investor put a value on this company? When Twitter reported fourth-quarter results in early February, revenues were higher than expected, and the company would have eked out a quarterly profit were it not for its high stock-based compensation expense. However, the market was severely disappointed with Twitter’s decelerating rate of user growth, and the stock price fell sharply in response. Sales by insiders and large shareholders could put more pressure on the stock once the lock-up period ends in early May.
Businesses that use Twitter to promote their products and services will not continue to do so if they feel that they are not getting a good return on their advertising dollars. And Twitter must ensure that advertising does not become so intrusive that it drives away users, and that its platform isn’t used by spammers. International operations have unique challenges, such as exposure to exchange rates, and international advertising generates less than a third of the company’s top line.
In addition, there is no assurance that Twitter will remain relevant. MySpace faded after being a leading social media provider at one time, and there has been concern about possible user defections from Facebook (FB), including a decline in daily use among younger teenagers. Finally, investors should note that, as an emerging growth company, Twitter does not have to comply with all of the reporting requirements of other public companies, such as an audit of its internal controls for financial reporting under the Sarbanes-Oxley Act. Not surprisingly, Twitter pays no dividend and is not likely to do so anytime soon.
For a more thorough look at Twitter, and the particular investment merits of its stock, subscribers should examine our full report in The Value Line Investment Survey.
At the time of this article’s writing, the author did not have a position in any of the stocks mentioned.