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Twitter Files S-1

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As anticipated, Twitter filed form S-1 with the Securities and Exchange Commission on Oct 3, 2013 for its Initial Public Offering (IPO). Although Twitter said that it will trade under the symbol TWTR, the company did not provide any details regarding the number of shares it intends to offer, the price range and also the U.S. exchange it will select for trading.

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.

Founded in Mar 2006, San Francisco-based Twitter offers a social short messaging/micro-blogging service, which is currently used by more than 215 million people worldwide on a monthly basis. The company processes more than 5 million tweets per day and has 100 million daily active users. Currently, it has approximately 2,000 employees.

At the end of the second quarter of 2013, Twitter’s average monthly active users surged 44.0% from the year-ago quarter to 218.3 million. As per Twitter, 75.0% of its average monthly active users access Twitter from a mobile device. Mobile advertisement contributes 65% of its revenues.

In the first half of 2013, Twitter earned revenues of $253.6 million, which soared 107.0% from the year-ago period. Advertising generated 87.0% of revenues during the period. However, Twitter has reported net loss in the last three years (fiscal 2010, 2011 and 2012) and also in the first half of 2013.

Reportedly, Goldman Sachs Group (GS - Free Report) will be the lead underwriter of the IPO. Twitter targets to raise at least $1.0 billion from the IPO. As per valuations made by one of Twitter’s investors GSV Capital, the company is currently worth $10.5 billion, which is significantly lower than Facebook’s (FB - Free Report) valuation of $100.0 billion at the time of its IPO in 2012.

Analysts believe that Twitter may aim for a valuation of $15.0 billion, at the time of pricing its IPO. This is particularly based on positive revenue estimates, although the company continues to report loss.

Market-research firm eMarketer expects Twitter 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 gained stupendous momentum already. The company earns by inserting paid ads for a targeted audience, which resembles normal tweets. The success of this advertising model prompted Facebook to launch a similar ad product – Sponsored Stories – in 2012.

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) are key growth catalysts, in our view.

However, we believe that Twitter will face stiff competition from more established players such as Facebook, LinkedIn and Google in the advertisement market (its primary revenue generation tool) going forward.

Currently, Facebook has a Zacks Rank #2 (Buy). Goldman Sachs, LinkedIn and Google carry a Zacks Rank #3 (Hold).

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