Don't You Worry -- Twitter's Profits Will Come

 | Nov 05, 2013 | 10:30 AM EST  | Comments
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Since social-networking giant Twitter is expected to come public this week (with planned ticker symbol "TWTR"), I decided to look at the company and take a stab at making a recommendation.

Twitter is expected to come public Thursday on the New York Stock Exchange. It should be a hot offering. The company plans to sell 70 million shares between $17 and $20 a share and, for all their hard work, the underwriters have generously set aside an additional 10 million-share overallotment for themselves. Assuming the overallotment is filled, Twitter will end the day with 80.5 million shares sold, and the company should raise between $1.2 billion and $1.6 billion before fees.

The social network has more than 232 million monthly active users, including 53 million in the U.S. Approximately 76% of users access Twitter through a mobile device, making the network especially valuable to marketers. In fact, 70% of the company's revenue comes from mobile.

Approximately 77% of Twitter's user base is international, but only 25% of revenue comes from overseas. In other words, of Twitter's estimated $600 million in revenue for fiscal 2013, 75% of it comes from just 23% of its users. This is a huge opportunity: If management can figure out how to tap the overseas market, revenue growth should be very strong for many years.

For the first nine months, 11% of revenue came from the sale of data licenses. Advertisers use Twitter's real-time analytics platform to check up on what users are Tweeting about.

For all of 2013, Twitter should post more-than-doubled revenue, which works out to about $550 million. Data sales are climbing more than 30% per year. If you assume Twitter's torrid top-line growth slows to 65% next year, the company will have more than $900 million in just advertising revenue and close to $1 billion in total -- not too shabby. In fact, it's not hard to get to $2 billion in revenue sometime between 2016 and 2017.

Ignore the talking heads on television who are worried that Twitter doesn't make any profit. While it's true the company hasn't made a dime, look at other social platforms. Facebook (FB) has an estimated 46% operating margin for the current year. Right now, Twitter has just a 7% margin and loses money. But after the company gets through a period of heavy investment, the cash will pour in. Facebook has a 75% gross margin. Holy cow -- it's almost all profit.

I don't think Wall Street will make the same mistake it did with the Facebook offering. The NYSE has been testing its systems to make sure they can handle the volume, and I'm sure lead underwriter Goldman Sachs (GS) is working overtime to make sure the deal goes smoothly. I'm positive the stock will double by the day's end as the underwriters pay off their big clients. But then what?

I would look for the stock to cool off sometime in the next few weeks as big investors pocket their gains into year-end. I'll be looking for an opportunity to get into the stock below $30, with the idea that it's a speculative bet on continued double-digit revenue growth. Profit will come. If Twitter can get to $2 billion in revenue by mid-2016, I think the stock will be considerably higher.

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