Twitter’s $2 Billion Test: Turning Profits for Wall Street

Trading at the New York Stock Exchange under the symbol TWTR, Twitter is seeking to join the world’s biggest Internet properties.

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In the seven years since its creation, Twitter has been used to spark revolutions, allow fans to chat with celebrities and spread news from the farthest corners of the world.

But can it make money?

The company is taking the first steps to answering that challenge on Thursday, opening itself for sale to investors in an initial public offering that is expected to raise nearly $2 billion and will test its ability to leverage its 232 million users into profits.

Trading on the New York Stock Exchange under the symbol TWTR at a starting price of $26 a share, the company is being valued at $18 billion based on outstanding stock, options and restricted stock expected to be available after the IPO, according to The Associated Press. Twitter is seeking to join the world’s biggest Internet properties, a stage dominated by Apple, Google and Facebook.

Next to them, Twitter can seem like a skinny adolescent. It suffered through frequent management changes and boardroom clashes before turning to an “adult” CEO for guidance and stability. Revenue is exploding, thanks in part to the development of the “promoted tweet” and marketing partnerships with the television industry. But losses are mounting as well, and its growth in Twitter users has slowed significantly.

Still, Twitter arguably could not have picked a better time to go public. The bullish stock market is fielding a bumper crop of IPOs, and on Wednesday the Dow Jones industrial average closed at an all-time high.

Twitter's IPO’s success, and its stock’s long-term performance, will help determine whether the company can become, in the words of CEO Dick Costolo, “the pulse of the planet” without losing its focus.

Twitter has tremendous power and reach -– it was instrumental in the Arab Spring uprisings and is, for millions of news consumers, the first digital draft of history — but observers say it runs the risk of being drowned by the deluge of 500 million or so messages it handles on a daily basis.

“It’s fair to say that people have a harder time defining the appeal and value of Twitter relative to other social networks,” said Scott Kessler, an analyst at S&P Capital IQ. “Facebook is a social network for friends. LinkedIn is a social network for business contacts. But people have a harder time describing Twitter. They need to do a better job communicating what they are, what they offer and how to get value from the platform.”

With 70 million shares available on the market, the central concern among investors is whether Twitter can become profitable and, if so, how long that will take.

Twitter took in $317 million in revenues in 2012 but lost about $80 million. Revenues soared this year, to $422 million, but losses did too, to $134 million.

Facebook, by comparison, reported an annual profit of $1 billion before its May 2012 IPO. Its 1.2 billion users dwarf Twitter’s.

But Facebook’s IPO, listed on Nasdaq, is generally considered a failure. It overstated its initial asking price, was beset by trading delays and other glitches and ended the day up just 23 cents higher than its $38 IPO price.

Facebook’s stock price has since climbed by about 28 percent.

Twitter hopes to learn from Facebook’s IPO missteps.

Many analysts thought the company deliberately listed its initial price for institutional investors on the low side. Twitter started at a projected price range of $17 to $20 a share, then rose to a range of $23 to $25 a share before settling on $26 after markets closed Wednesday.

Investors took that as a sign of high demand heading into the IPO on Thursday.

The company has said it will channel the proceeds of the IPO into operating expenses and capital spending. It is also expected to fund the acquisition of other companies.

For now, Twitter is hoping for what is known in the business as a first-day “pop,” in which the stock price jumps during the early hours of trading.

When the initial clamor over the IPO passes, Kessler said, investors and analysts will look at Twitter’s operations for its handling of three key goals: sharpening its brand definition, moving closer to profitability and generating more revenue through new advertising products, mobile platforms and international markets.

“As much excitement as there has been around the company and the IPO, they have to demonstrate that they can generate profits sooner rather than later,” Kessler said.

Twitter has been vague about its advertising plans and when it expects to get into the black.

Kessler thinks it won’t happen until 2015. Anything later, he said, could be seen by investors as a disappointment.

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