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Twitter's IPO risks include ads, users and financial losses

Social network cites about 55 risks to potential investors in Twitter IPO

As Twitter looks to convince investors its initial public offering (IPO) is a good bet, analysts are studying the biggest challenges facing the company, like finding a path to profitability while fending off rivals like Facebook and Google.

In an S-1 filing with the U.S. Securities and Exchange Commission, the company listed about 55 business risks that were explained over a number of pages.

The company cited a wide range of factors, including a history of financial losses, the difficult task of continuing to grow its user base, the possibility of alienating users with advertising, Internet blockages in foreign countries and the threat of earthquakes.

Analysts say Twitter's list of potential obstacles is quite thorough, though the caution isn't surprising considering the troubles faced by Facebook after its tumultuous IPO last year.

"It's not all that unusual for companies to list a huge number of risks that might put investor's investments in jeopardy," said Dan Olds, an analyst at Gabriel Consulting Group. "It's a sign of today's litigious times that firms need to cover themselves by disclosing each and every tiny risk the company might face."

At the head of Twitter's list of "what-ifs" is concern about the company failing to continue its user growth rates or seeing a drop in user engagement.

"Our financial performance has been and will continue to be significantly determined by our success in growing the number of users and increasing their overall level of engagement on our platform as well as the number of ad engagements," the company said in the S-1 filing. "We anticipate that our user growth rate will slow over time as the size of our user base increases."

Twitter also noted its financial record of steady losses as a risk for investors.

"Since our inception, we have incurred significant operating losses, and, as of June 30, 2013, we had an accumulated deficit of $418.6 million," the filing said. "Although our revenue has grown rapidly, increasing from $28.3 million in 2010 to $316.9 million in 2012, we expect that our revenue growth rate will slow in the future as a result of a variety of factors, including the gradual slow down in the growth rate of our user base."

Jeff Kagan, an independent analyst, said Wall Street and industry analysts will be scrutinizing the potential problems.

"Investors want to make money, period," Kagan said. "Investors aren't in it to send tweets. If they can't make money with Twitter, they'll invest in something else.

The first questions from investors is: "How long will it take Twitter to make money?" he added.

Kagan said that investors likely won't get the answer they want in this case.

"Twitter is going to become this big event and it's going to attract a lot of people because of the noise and light," said Kagan. "If this didn't have the Twitter brand, it wouldn't be ready to go public."

Rob Enderle, an analyst at Enderle Group, said the best path to profitability -- finding ways to add ever-more advertising to the site -- is risky in that it could anger users.

The S-1 filing says that Twitter generated 85% of its 2012 revenue from advertising and 87% in the first six months of 2013.

Twitter generated nearly all of its advertising revenue through the sale of its three Promoted products: Promoted Tweets, Promoted Accounts and Promoted Trends, the filing said.

Adding more of those and/or creating different kinds of ads on the site or via Twitter's mobile apps could bring in more money. But it could also irritate users enough to convince them to stop using the site or to use it less.

"If you do ads the wrong way, you'll turn users off. That's going to be one of their bigger risks," said Kagan. "Some people are easily annoyed by ads. If ads are bigger and they start to invade on your screen, then that starts to wear on customers."

The filing does show that Twitter is doing well in finding ways to generate revenue from mobile device users. For instance, more than 65% of its advertising revenue in the quarter ended June 300 was generated from mobile devices.

That's a solid result considering how many companies are still struggling to figure out how to engage and generate revenue from users on mobile devices.

"Twitter is in damn good shape when it comes to mobile devices," said Olds. "Sixty-five percent is a very big number. Can Twitter turn these mobile users into money by showing them ads or offering services that guide them to Twitter advertisers? Their ability to do this is a key consideration for investors."

That said, Olds believes that Twitter is a higher-risk bet than either Facebook or LinkedIn, which were both profitable were at the time of their IPOs.

Kagan, though, is more optimistic.

"If Twitter does a good job of organizing the company, focusing on opportunity and saying we're not making money now but join us because, when we do, we'll kick butt, then it could work," he said. "They'll do well because of their brand name."

Sharon Gaudin covers the Internet and Web 2.0, emerging technologies, and desktop and laptop chips for Computerworld. Follow Sharon on Twitter at @sgaudin, or subscribe to Sharon's RSS feed . Her email address is sgaudin@computerworld.com.

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