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Twitter Inc. recently tweeted that it has filed confidential papers to start the process of its Initial Public Offering (“IPO”). Founded in Mar 2006, San Francisco-based Twitter offers a social short messaging/micro-blogging service, which is currently used by more than 200 million people worldwide.

Twitter filed the IPO papers with the Securities and Exchange Commission under a new law passed last year. The law allows companies with revenues of less than $1.0 billion in its last fiscal year to keep their IPO documents private, till the last few weeks (21 days) before a price is set on the stock offering.

According to the Wall Street Journal, the law is quite lenient toward disclosures and also allows the companies to quietly withdraw the filing if they find the demand for the stock not satisfactory. However, we believe that this will not be the case for Twitter, due to a booming technology IPO season.

Reportedly, Goldman Sachs Group (GS - Analyst Report) will be the lead underwriter, while other banks are also expected to enter the process going forward. According to the Wall Street Journal, Twitter’s current valuation is around $9.0 billion, which is significantly lower than Facebook’s (FB - Analyst Report) valuation of $100.0 billion at the time of its IPO in 2012.

As per valuations made by one of Twitter’s investors GSV Capital, the company is currently worth $10.5 billion. Analysts believe that Twitter may aim for a valuation of $15.0 billion, at the time of pricing its IPO.

Although not much is publicly available regarding Twitter’s financial condition, market-research firm eMarketer expects the company to generate advertisement revenues of $582.8 million this year. For 2014, advertisement revenues are expected to grow 63.0% to $950.0 million. Twitter is expected to earn advertisement revenues of $1.33 billion by 2015.

Twitter introduced its advertisement service only in 2010 and its revenue growth rate has already gained stupendous momentum. The company earns by inserting paid ads for a targeted audience that resemble normal tweets. The success of this advertising model prompted Facebook to launch a similar ad product – Sponsored Stories – in 2012.

According to the Wall Street Journal, Twitter has already raised more than $1.0 billion in private financing including funds from Russian billionaire Yuri Milner and mutual fund firm T. Rowe Price Group (TROW - Analyst Report). We believe that a successful IPO will help Twitter to further invest in expanding its offerings that will attract more users and simultaneously more advertisers.

Twitter’s popularity among the business and social circles for “breaking news” and its strong position in the mobile platform (compared to Facebook at the time of its IPO) is a key growth catalyst, in our view. However, we believe that Twitter will face stiff competition from more established players such as Facebook and Google in the advertisement market going forward.

Currently, Facebook has a Zacks Rank #2 (Buy). Goldman Sachs and T. Rowe Price carry a Zacks Rank #3 (Hold), while Google has a Zacks Rank #4 (Sell).

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