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Twitter (TWTR - Analyst Report) recently bought approximately 900 patents from International Business Machines (IBM - Analyst Report). The companies also entered a cross-licensing agreement, which will allow IBM to continue using the patents. However, the financial terms of the transaction were not disclosed.

Just prior to Twitter’s Initial Public offering (IPO) in 2013, IBM threatened to sue the company for allegedly violating three of its patents. The current deal not only ended the skirmish but also expanded Twitter’s patent portfolio substantially.

At the time of the IPO, Twitter had 9 patents with another 95 pending applications. This was meager compared to its closest peer Facebook’s (FB - Analyst Report) 774 patents prior to its IPO in 2012. The lack of patents made Twitter vulnerable to legal attacks, which would have stalled its expansion plans.

As Twitter plans to expand its services by offering new products including video, we believe that the enhanced patent portfolio will remove this vulnerability. According to Bloomberg, Twitter bought patents related to technologies used for video compression, messaging and international shipping requirements.

Twitter is set to release its first earnings report on Feb 5. The company’s 232 million and growing monthly user base is the key growth catalyst. New products and services are expected to help the micro-blogging site attract new customers, going forward.

Since its IPO, Twitter has surged 43.7%. Twitter’s bullish run is primarily driven by investor optimism on its ability to attract more advertising revenues, despite facing significant competition from Facebook and market leader, Google .  

As spending on online advertising is expected to increase manifolds compared to traditional media, Twitter has massive growth opportunity, due to its strong mobile products. Mobile advertisement contributes approximately 70.0% to Twitter’s revenues.

According to market research firm, eMarketer, Twitter’s revenue share in mobile advertising market is expected to increase from 2.6% in 2012 to 3.2% in 2013. This is further expected to increase to 4.1% in 2014 and 4.4% in 2015.

The Zacks Consensus Estimate for the last quarter is currently pegged at a loss of 10 cents on revenues of $212.0 million. For fiscal-year 2013, the Zacks Consensus Estimate is pegged at a loss of 76 cents on revenues of $634.0 million.

Currently, Twitter has a Zacks Rank #3 (Hold).

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