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David N. Frazier: Twitter Tweeting Its Way to Prosperity

By    |   Tuesday, 17 December 2013 05:21 PM

Twitter Inc. (TWTR) has been on fire lately, more than doubling from its IPO price of $26 on Nov. 6, 2013, to close last Friday at $59.

During the same period, the Dow Jones Industrial Average rose a paltry 8 points (0.1 percent) while the S&P 500 Index advanced a meager 0.3 percent.

So, what’s been behind the meteoric rise in TWTR?

Editor’s Note: Obama Donor Banned This Message (Shocking)

I’ll answer that question in just a moment, and I’ll tell you why I think TWTR could make you a lot of money over the next few years.

But first, I’ll provide you with some general information about Twitter, as I learned many years ago the importance of gathering as much information about a potential investment/speculation before committing any money to that investment.

Who/What Is Twitter?

Twitter operates a free digital service site that enables persons around the globe to post and send short messages (limited to 140 characters) to anyone else who has a Twitter account.

Those “tweets” can be sent from a personal or laptop computer via the company’s website, as well as from smartphones and various other mobile devices.

The company’s service has become a key communication platform for major events that occur around the world, with more than 230 million Twitter users posting and sending messages instantaneously about those events as they unfold in real time. As of November 2013, Twitter’s users sent approximately 500 million tweets a day.

Twitter’s users include millions of people from around the world, as well as influential individuals and organizations, such as world leaders, government officials, celebrities, athletes, journalists, sports teams, and news organizations.

Because Twitter’s users can be followed by millions of other users without requiring a reciprocal relationship, the company’s users are often able to reach a very broad audience of potential followers.

Twitter provides a compelling and efficient way for people to stay informed about their interests, become almost instantly aware of major events around the world, and to interact easily with others around the world.

The company’s messaging platform enables users to browse through tweets quickly and to explore content more deeply through links and photos that can be attached to a tweet.

Hence, when a major event of interest occurs, in any part of the world, the digital experience of those events happens in real time on Twitter. And users can communicate with each other during those events as they occur, often receiving content faster than through other forms of media.

In comparison, other social networks, like Facebook, are generally closed, private networks that do not include content from outside the user’s friends, family, and mutual connections.

Hence, while the content that’s delivered by those networks might be important, that content is limited to people with whom the user has a mutual, symmetric relationship.

In addition to becoming a de facto communication system for breaking news, Twitter has been adopted as a common communication and learning tool in universities, enabling students to communicate more easily with each other and faculty members.

Twitter is available in 33 languages, including Basque, Czech, Russian, and Greek, as well as Arabic, Farsi, Hebrew, and Urdu.

Some other general information about Twitter is outlined below:

• Over 6 million websites have integrated with Twitter.

• Approximately 48 billion impressions of tweets are included on non-affiliated websites.

• Computer software developers have registered more than 3 million applications to integrate those with Twitter.

• Unlike other social networking sites, which tend to cater mostly to younger persons, Twitter’s users tend to come from all age groups and to include business persons and political leaders.

• Many of the world’s trusted media outlets, including the BBC, CNN, and Times of India, use Twitter regularly as a platform for content distribution.

• More than 20 Roman Catholic cardinals manage active Twitter accounts, nine of whom are cardinal electors for the 2013 Papal conclave.

• The heads of state of 125 countries, and 139 other politicians, have used Twitter accounts to send more than 350,000 tweets. Collectively, those persons have approximately 52 million Twitter followers.

How Does Twitter Make Money?

Like other social network sites and media outlets, Twitter makes money by selling advertisements.

The company provides compelling value to its advertisers by enabling them to reach a large global audience through its unique set of advertising services, and to target users based upon their specific interests.

Although Twitter does not display advertisements directly on its site, or generate revenue directly from its users or platform partners, the company benefits from the creation and distribution of the content on its site. That content attracts a large number of users, platform partners, and advertisers, and it results in a virtuous cycle of value creation that advertisers use to target users based on the user’s tweeting history.

Advertisers can promote their products on Twitter’s platform in a variety of ways, from broad global campaigns to highly-targeted local ads.

Twitter’s real-time nature enables advertisers to capitalize on live events, millions of user tweets, and trending topics. Advertisers can create relevant advertisements that are shaped by those events, conversations, and topics — in real time — by using the company’s promoted products.

Those advertisements are incorporated into Twitter’s platform without disrupting or detracting from the user experience. In addition, those advertisements are designed to be as compelling and useful to Twitter’s users as any organic content on the company’s platform.

Nielsen, a global information company that provides market research and data about the things that people buy, found that Twitter’s users who engaged with an advertiser’s promoted products reported, on average, a 30 percent higher brand favorability and 53 percent higher purchase intent than users who did not interact with a company’s promoted tweet.

Advertisers are able to target an audience based on a variety of factors, including a user’s “interest graph,” which maps users’ interests based on other Twitter users that they follow and actions that they take on Twitter, such as the tweets that users create and the interactions that they have with other users.

Interest graphs produce a clear and real-time signal of a user’s interests, thereby enhancing the relevance of the advertisements that Twitter displays for its users and helping advertisers to target specific users for their advertising campaigns.

In an effort to continue to grow the company’s base of advertisers, during late 2012 Twitter entered into a multi-year agreement with Nielsen to produce social TV ratings, a metric that measures the social engagement around TV viewing.

If that metric is widely adopted, it would likely encourage content partners to put more content on Twitter. Any such action would likely lead to more revenue opportunities for Twitter in the form of promoted tweets. In response to that partnership, Advertising Age, a market research firm, said that Twitter had become the new TV Guide.

In an effort to capitalize further on its Nielsen partnership, in February of this year, Twitter acquired Bluefin Labs, a data miner whose analysis tells which brands (e.g., TV shows and companies) are chatted about the most in social media.

On Oct. 28, Twitter acquired MoPub, a mobile-focused advertising exchange that enables companies to keep track of their advertising inventory in real time and helps advertisers to match publishers quickly with advertisements that are accessible via mobile devices.

Twitter plans to use MoPub’s technology to build real-time bidding into the Twitter ads platform so that its advertisers can more easily automate and scale their advertising purchases.

Where Is the Company’s Stock Headed?

There’s no doubt that Twitter is, and in my opinion will continue to be, a social phenomenon!

As a result of the company’s growing base of advertisers, Twitter grew its revenues at a minimum rate of 105 percent, on a year-over-year basis, during each of the past seven quarters.

But, that doesn’t mean that investing in Twitter will make you a fortune, unless you’re patient enough to wait for the right time to buy that potential 10-bagger.

In light of the fact that Twitter has lost money, on a net income basis, during every quarter since its founding during 2006, and the fact that its stock closed on Dec. 13 at a whopping $59 per share, financial market participants appear to be substantially overvaluing TWTR at this time.

The fact that TWTR closed yesterday at a price that’s equal to 23 times Wall Street analysts’ projections for the company’s revenues, and 125 times its earnings before interest, taxes, depreciation and amortization (EBITDA), for the year 2015, seems to support that claim.

Analysts at Wells Fargo and Suntrust seem to agree with my analysis, with those firms downgrading Twitter’s stock on Dec. 16 to Underperform and Neutral, respectively.

Fortunately, Twitter is very well capitalized, with the company’s cash and cash equivalents alone covering its current liabilities by a ratio of 1.9, and those cash assets covering all of Twitter’s financial obligations by a ratio of 1.1, as of Sept. 30, 2013.

The company’s strong financial condition improved further during the quarter ended Sept. 30, 2013, with Twitter generating a positive cash-flow from operating activities — of $4.2 million — after losing money on a cash-flow basis during all prior periods.

Although Twitter’s advertising revenue model and worldwide exposure bodes well for the company for at least the next few years, I’m concerned about the company’s ability to earn a profit.

During each of the past two quarters, Twitter’s losses widened considerably, with the company losing $42.2 million and $64.6 million during the three months ended June 20, 2013 and Sept. 30, 2013, respectively, as compared to a loss of $27 million during the quarter ended March 31, 2013. In comparison to year-ago results, Twitter lost $24.6 million and $57.3 million during its June and September quarters, respectively.

Therefore, I urge any of you who are following Twitter to hold off on allocating any of your money to TWTR until the company gives some type of assurance that it will earn a profit.

If the company is able to continue to grow its business without incurring substantial expenses in developing new products/services, the longer-term outlook for Twitter and its stock appears to be very favorable. That’s because I expect the company to be able to reduce its general and administrative expenses, as well as its sales and marketing expenses, as a percentage of revenues, considerably over the next few years. If that were to occur, every extra dollar of revenue would put Twitter one step closer to generating a profit.

Editor’s Note: Obama Donor Banned This Message (Shocking)

David N. Frazier has an extensive background in the investment securities industry and has invested in the financial markets for more than 25 years.

In addition to working as a business analyst, merchant banking analyst and equity research analyst, he’s held positions in sales and marketing at institutional investment firms, including William O’Neil & Co., TDAmeritrade, and Merrill Lynch.

David now serves as the President and Chief Market Strategist of Frazier & Mayer Research, LLC (dba
www.TheMarketMonk.com), an independent investment research firm that provides research and analytical services to hedge funds, investment advisory firms, and other investment newsletters.

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Twitter (TWTR) has been on fire lately, more than doubling from its IPO price of $26 on Nov. 6, 2013, to close last Friday at $59.
Tuesday, 17 December 2013 05:21 PM
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