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Twitter IPO – Beware of These 4 Risk Factors

Deal demand is strong, but TWTR is no lock


Well, it looks like the Twitter IPO roadshow was a big hit. On Monday, the company boosted the price range on its deal to $23-$25, up from an initial TWTR range of $17 to $20

Demand for the Twitter IPO is heavy, and there’s a good chance the IPO will pop on Thursday, its first day of trading.

But maybe the enthusiasm is getting a little out of hand.

We all remember what happened during the disastrous Facebook (FB) IPO. This is another hot social deal, so the natural parallels are being made.

Granted, the Twitter offering probably won’t have any huge technical issues like what happened with the Nasdaq. The New York Stock Exchange has been testing its systems extensively, and it looks like everything is ready for a smooth transaction.

But when taking a look at Twitter’s S-1, there are a few troubling things that investors need to consider. And over the long-term, the problems could eat away at the value of the company’s shares.

Here’s a look at four such risk factors for the Twitter IPO:

Peak Social

It’s been a tremendous year for social stocks. LinkedIn (LNKD) is near a doubler. Pandora (P) is up 190%, and Yelp (YELP) has returned 275%.

The bull move shouldn’t be surprising. We’ve seen a surge in mobile usage, and advertisers’ willingness to spend money on the medium. But it looks like Wall Street has more than factored in social stocks’ good fortunes … so if there are signs of any problems, investors could get jittery.

This was the case with Facebook’s third-quarter earnings report. Growth was standout, but FB shares fell because of concerns about the service losing its “cool” factor with teens, as well as the limits of placing ads in mobile feeds.

TWTR currently trades at 26 times revenues (based on the high end of its price range), so a big move on the first day certainly would put the valuation into nose-bleed territory.

True, Twitter does have the advantage that is is growing at a hefty rate, with revenues spiking 102% in the latest quarter. It also helps that about 70% of revenues come from mobile sources, which undoubtedly is the direction of technology’s future. Yet the fact remains that TWTR has yet to post any earnings. And based on the Twitter IPO roadshow, it looks like there is no urgency to change this; Twitter continues to ramp up expenditures on hiring for R&D and sales.

User Growth

Twitter’s growth looks strong on a year-over-year basis, during which the monthly active user count jumped by 39% to 232 million. But momentum is decelerating. YOY growth at the end of Q2 was 44.37% and 47.82% in Q1. The slowdown is even more pronounced on a quarter-over-quarter basis — it was 10.27% in Q1 and just 6.13% in Q3.

Several factors are at work here. One is that Twitter gets big boosts from global events. However, after these fade, there’s a tendency to stop using the service — a trend that’s particularly evident outside the U.S.

Another issue is that Twitter’s appeal might be inherently limited. After all, your grandmother might visit Facebook to see photo albums of her grandkids, but a stream of quick blips might be another thing altogether.

Intellectual Property

Twitter is actually fairly weak in this area. TWTR has a mere nine patents and 95 pending applications. Compare that to Facebook’s 1,400-plus patents.

With light protection, Twitter is vulnerable to lawsuits. Consider that the company recently disclosed in its S-1 that IBM (IBM) is claiming infringement on three patents and is looking to negotiate a settlement.

Fickle Users

People have many social platforms from which to choose. Twitter already is feeling heat from its rivals, such as Snapchat, but also foreign-based operators like Weibo and Line. And let’s not forget established channels such as Facebook and G+.

The consumer Internet sector is full of examples of hot properties that have suddenly cooled down. Friendster. MySpace. AOL (AOL). Yahoo (YHOO). Zynga (ZNGA). Long story short — it’s difficult to keep users interested for the long haul.

Bottom Line

The Twitter IPO is far from a slam dunk. Other issues include a deceleration in the growth rate in views of timelines, from 92% in Q1 to 50% in Q3. Twitter added photos and videos inside its news feed, but this could turn out to be a disruptive experience that results in users flocking to rival services.

I’ll discuss my overall thoughts on the Twitter IPO before it goes live, but investors should keep these possible headwinds in mind before buying on hype alone.

Tom Taulli runs the InvestorPlace blog IPO Playbook. He also is the author of High-Profit IPO StrategiesAll 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.

Article printed from InvestorPlace Media,

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