Twitter: Should Investors Wait For The Dust To Settle?

Image via Flickr/ Anthony Quintano

As we reported earlier,  the Twitter Inc. (NYSE: TWTR) IPO kicked off to an incredible start. The stock, which closed today at $43.00 a share, rose from Goldman Sachs’s set price of $26 per share to a high $50.09 per share on IPO day. This bullish run underscores the overwhelming hype surrounding Twitter. If this hype is anything to go by, Twitter is a top pick for any right-minded investor. However, Facebook’s year-ago IPO flop provides insight into how just dangerous emotional trading can be with tech stocks. Investors need to wait for the dust to settle before they can make any long-term moves.

Bottom Line Conundrum

Perhaps the biggest sticking point in the Twitter buy/sell debate is its negative bottom line. Investors have made a clear tradeoff between earnings and growth prospects and some pundits warn that this could end badly.

Just as a recap, Twitter had a loss of $133.9 million for the first nine months of 2013, an 89 percent increase from the same period in 2012. This loss came even as user growth on the micro-blogging site slowed down. In the third quarter of 2013, it had approximately 232 million users, up from 218 million users in the year-ago quarter. This represented a 6 percent year-on-year growth, down from 10 percent when compared to the period between 2011’s third quarter and 2012’s third quarter. Slowed growth means that Twitter will have to spend more money to squeeze out more ad revenue from its user base. This will translates into new product offerings and several overhauls. Although these added costs may come in the form of one-offs, they will be a huge drag at a time when the company desperately needs to turn a profit.

Growth Prospects May Be A Reflection Of Overall Hype In Markets

On the flipside, Twitter’s top line is headed in the right direction. For the first nine months of 2013, it posted sales of $442 million, up from $204 million in the same period during 2012. In addition, it is expected to gross $1 billion in fiscal 2014. Twitter also seems to have a successful mobile monetization model. At the end of October, 70 percent of its ad revenue came from mobile, up from 65 percent in June. This comes amid ongoing recruitment of Android users to give reviews on the mobile app; a clear indication that Twitter intends to step up mobile monetization even further.

While Twitter’s growth prospects are convincing, the possibility that they could be a reflection of the overall hype in the markets cannot be ruled out.  Data from Dealogic indicates that so far this year, US companies have put out $51 billion in first-time stock issues or IPOs. This is the most since $63 billion in the same period in the year 2000; the same year tech bubbles burst. This data indicates that the market may well have gone beyond its support pillars and that most of the current rallies are being fueled solely by emotion and not fundamentals.


Investors looking to add Twitter to their portfolio for the long-term should wait for the dust to settle. There are still a lot of factors at play that need to come to clearer focus.

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