Will the Twitter bubble burst?

Internet giant reports quarterly earnings for the first time tomorrow but is it overvalued?

The Twitter symbol is displayed at the post where the stock is traded on the floor of the New York Stock Exchange. Photograph: Brendan McDermid/Reuters

The Twitter symbol is displayed at the post where the stock is traded on the floor of the New York Stock Exchange. Photograph: Brendan McDermid/Reuters

 

Twitter , whose stock has surged 150 per cent since it went public in November, has a lot to live up to when it reports quarterly earnings for the first time tomorrow.

A growing number of naysayers warn that Twitter’s stock is greatly overpriced, and that even mediocre inaugural results could deflate its soaring valuation, now several times that of its closest social media peer, Facebook.

But a clutch of earnings from the giants of the Internet sector last week suggest the company’s mobile advertising business model is rooted in solid - and fertile - ground.

Facebook last week posted its strongest quarterly revenue growth in two years, even though 53 per cent of its advertising revenue came from mobile users, once its Achilles heel.

Facebook shares shot up 14 per cent the day after the news. That’s a stark turnaround from 2013, when a shift in consumer behavior from PCs to mobile devices threatened to upend established advertising businesses, and forced powerhouse companies like Facebook to adapt to the changing times.

Facebook responded by aggressively shifting its emphasis from displaying banner ads to injecting paid marketing messages straight into the stream of updates shown to every user called the newsfeed - a model originally refined by Twitter and one ideally suited for viewing on small smartphone screens. “Mobile continues to drive our growth,” David Ebersman, Facebook’s chief financial officer, told analysts last Wednesday.

“The key driver of ad revenue growth continued to be the strong performance of newsfeed ads on mobile and desktop.” Facebook’s successful transition to mobile bodes well for Twitter, which similarly places ads called “promoted tweets” into users’ timelines. But it highlights a tough road ahead for companies that rely on selling ads on the periphery of websites.

Last week, Google and Yahoo reported declines in ad prices during the fourth quarter, as marketers hesitated to pay for display ads at a time they are increasingly viewed on cramped smartphone screens rather than PC displays.

Google offset those declines by boosting the overall volume of its ads thanks to its massive reach. Yahoo appeared to face a greater challenge as it grapples with how to revamp its products for mobile audiences, analysts say. Yahoo’s stock has slid 8 per cent in the week since its earnings call. “Any company that has not been successful transitioning to mobile has just not been successful in this next leg of Internet growth,” said Ryan Jacob, chief executive of the Jacob Funds, which owns shares of Google, Yahoo and Facebook.

Even if Twitter’s business model appears firmly grounded, questions remain over whether future expectations are outpacing its present-day financial performance.

Twitter closed 1 per cent higher at $65 a share yesterday. At that price, the stock is at 32 times expected 2014 sales, compared to 14 times for Facebook and 12 times for LinkedIn .

Currently, seven analysts recommend or strongly recommend buying the stock, 13 rate it as “hold”, and 11 have it as “underperform” or “sell.” That’s up from seven sell-equivalents a month ago, and five just two months ago, right after its market debut.

Although some tech companies, including Facebook and Google, do not offer financial outlooks, several analysts said they hoped Twitter’s management would comment on the company’s near-term potential, given the stock has divided investor opinion. “It’d be important to provide any kind of guidance, any kind of framework to bring everyone in line,” said Neil Doshi, an analyst with CRT Capital “If they don’t, we’ll see greater volatility in the stock.”

Wall Street expects the company to announce $218 million in revenue for the fourth quarter. Robert Peck, an analyst with Suntrust Robinson who was among the first Street prognosticators to slap a “buy” on Twitter before downgrading to neutral in December, said the metric to watch will be its user numbers.

Twitter had 232 million monthly users at the end of September, but its current valuation is predicated on the belief it could expand its appeal and eventually grow to a scale close to Facebook’s, which has five times more users, he said. “The question is: ‘What gets my mom to sign up for your service?’” Mr Peck said.

Reuters