Twitter Problems Persist As Stock Rises

12/4/13 3:13PM EST

Twitter Problems Persist As Stock Rises Twitter Problems Persist As Stock Rises

Image via Anthony Correia/Shutterstock

Twitter Inc (NYSE:TWTR) had the most widely followed IPO of any company in 2013, there’s little doubt about that. The company had a successful first day out, and everybody seemed tentatively happy with the valuation put on the company’s shares. Now that the markets, and analysts, have been given time to reflect, Twitter may not look all that strong.

Since it went public Twitter Inc (NYSE:TWTR) had lost more than 6 percent of its value through trading on Tuesday. That’s not a deathblow by any means, but it does signal a market less than comfortable with the valuation of the company at IPO. In the same period the S&P 500 has gained more than 2 percent. Twitter is an interesting company, but the firm faces a whole host of problems as it tries to grow. The company’s stock rose by around 5 percent on Wednesday’s trading, but analysts are not entirely convinced by the company’s business model.

Twitter Speed Bumps

On Monday some of the companies that underwrote the IPO released reports on the Twitter’s prospects. Deutsche Bank and Goldman Sachs released reports about the company alongside Morgan Stanley, Merril Lynch and JP Morgan reports. Just two of the reports, those from Goldman and Deutsche Bank, recommended that investors buy the stock.

There were several problems with Twitter Inc (NYSE:TWTR) referenced in the reports. The bottom line in the more negative reports was that it is unlikely for Twitter to reach the size and influence of Facebook Inc (NASDAQ:FB). The company is currently valued at around $23 billion. A company without a profit, and one valued on speculative growth, can see its market cap and share price decline massively overnight.

Twitter is, as J.P. Morgan analyst Doug Anmuth said in his report, trading at a significant premium to other social networks. Facebook Inc (NASDAQ:FB) stock may not be as attractive because a certain amount of growth potential is baked in, but the Menlo Park company has shown itself capable of earning money every year. Twitter still has to prove it can do so.

Twitter Monetization Is A Problem

Twitter Inc (NYSE:TWTR) needs to follow in Facebook’s footsteps if it wants to survive and grow. Facebook has managed to balance the engagement of its users with the needs of its advertisers. It is managing to turn a healthy profit and its numbers are continuing to grow. Twitter has very few of those things going for it right now.

Twitter still needs to grow its user base. At 200 million the company is still considered a niche social network. It needs to increase its ad load, and it needs to develop relationships with the industries holding the purse strings. This isn’t impossible, but the firm needs to hold the attention of its users at the same time. That might prove difficult.

Potential is massive at Twitter Inc (NYSE:TWTR), but so is valuation. The company is bound to face off with many of its risk factors in the coming years. Investors will have to decide for themselves whether the risk justifies the reward. Three out of the five companies that underwrote the IPO don’t really think so.

Disclosure: Author represents that he has no position in any stocks mentioned in this article at the time this article was submitted.