There’s little doubt that Twitter has created a tremendous brand and has changed the world — that’s part of why there’s so much commotion surrounding the Twitter IPO.
But as a business (if we’re to gauge it by Twitter’s S-1), the social media site is somewhat underwhelming.
Perhaps that’s why Twitter is so eager to get an IPO done.
One way to look at Twitter’s business is to compare it to Facebook’s (FB) at the point at which each reached the 200 million-user level. Twitter hit this mark after seven years of operation … but it took Facebook only five.
Here’s what both companies looked like for some key metrics (Twitter revenues are annualized at the 100% growth rate, and losses are assumed to remain at the current margin level):
|Company||Revenues||Profits||Employees||R&D (% of REVS)|
|$777 million||$229 million||1,218||11%|
|$649 million||-$176 million||2,000||44%|
While Twitter has certainly done a good job with the top line, the problem is that the company looks inefficient. Based on the numbers above, Twitter has a hefty work force and a massive R&D spend.
However, Twitter’s website and app still look fairly simple, and while Twitter has made some additions over time, there haven’t been many — certainly not on the same scale as Facebook.
The interesting thing is that great mobile apps often have small teams. According to a Wall Street Journal post, Instagram — which is treated as independent of its owner, Facebook — has only 32 employees. However, the app has more than 150 million MAUs despite only getting its start back in late 2010.
Another reason for concern: User growth has decelerated at Twitter. In the latest quarter, user growth was 7%, down from 10%-plus increases for the past three quarters. And again, pegging Facebook at its 200 million MAU mark, in 2009, FB’s quarter-over-quarter rate was between 18% and 25%.
Twitter’s user quality also is in question. This, from the Twitter S-1:
“We treat multiple accounts held by a single person or organization as multiple users for purposes of calculating our active users because we permit people and organizations to have more than one account. Additionally, some accounts used by organizations are used by many people within the organization. As such, the calculations of our active users may not accurately reflect the actual number of people or organizations using our platform.
Our metrics are also affected by applications that automatically contact our servers for regular updates with no user action involved, and this activity can cause our system to count the users associated with such applications as active users on the day or days such contact occurs.”
Advertising opportunities aren’t exactly as attractive when your selling message isn’t just reaching humans, but fewer humans than you thought thanks to multiple accounts — as well as Twitter bots that aren’t buying anything.
Facebook, meanwhile, has a strict one-account policy (that it actually tries to police), so it’s much easier for advertisers to target ads based on demographics, interests and behavior. Plus, it’s why Facebook enjoys wide popularity among several age groups. It has become a place to host your online identity, which is important in today’s world. All this explains FB’s continued strong user growth.
This isn’t necessarily a killer for Twitter, though. Many people and businesses also strive for an identity on Twitter, for one, and even if Twitter isn’t attractive to some age groups, there’s still plenty of opportunities to a more niche operator.
Despite all this, the Twitter IPO should have no problems getting off the ground. A surge in social stocks — such as Facebook, LinkedIn (LNKD), Pandora (P) and Yelp (YELP) — plus heady growth in mobile advertising should keep interest high.
But looking past the deal … Twitter could face some challenges with user growth, which in turn could mean a slowdown in revenues, and perhaps a limitation on the chances it’ll ever join the leagues of the mega-caps.
Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.