Issue of the week: Twitter’s public stock offering

As Twitter prepares for its initial public offering, “its books aren’t pretty,” said Cyrus Sanati in CNN.com. The social media company may be “the hottest name to hit the IPO circuit in some time,” but the public filing released last week portrays “a somewhat troubled and deeply unprofitable digital media company with lackluster growth and an exploding cost base.” The heart of the problem is that Twitter “isn’t really a tech firm; it’s a digital advertising platform”—and not a very good one. The company posted revenues of $317 million last year, compared with Facebook’s $3.7 billion in the year before its 2012 IPO. And Twitter has “failed miserably” in chasing ad dollars while “milking its private investors for cash”—a strategy that won’t work once it’s on the stock exchange. Twitter should take the time to improve its financials and “come back to the markets when it can show that it can truly stand on its two feet.”

There is much room for improvement, said Derek Thompson in TheAtlantic.com. Twitter may have hoped this IPO filing would “impress big institutional investors to buy the stock on day one,” but it only advertises the company’s stagnant prospects. Twitter is adding fewer users than it used to and is up against stiff—and better-funded—competition from other players. The company doesn’t seem to have a plan for making money, either. It generates 90 percent of its revenue from advertising, most of it from mobile ads, but that revenue will dry up if the company can’t add users or “demonstrate the value” of its ad products. And adding users will be hard. Twitter faces “competition and other barriers” in many important countries: Europe’s strictly regulated ad market is a difficult one for Twitter, and the company is banned entirely in China.

Yet Twitter is truly unique, said Vauhini Vara in NewYorker.com, and it shouldn’t be compared to Facebook. It’s true that “Twitter will be far less proven, as a business success, at the time of its IPO.” But the two years between Facebook’s founding and that of Twitter represents a generation in the development of the Internet, which “has changed so much in the past decade that the years sometimes seem to blur together.” It should surprise no one that Twitter is “not as far along.” The company’s valuation will likely prove much smaller than Facebook’s, but “maybe this is just as it should be.”

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“There are good reasons to be wary of an overhyped debut by a social media stock,” said Jeff Reeves in MarketWatch.com. But Twitter has a lot going for it. The company’s executives own relatively few of its shares, so they need to “keep an eye on Twitter’s stock price if they want to get paid.” And while Twitter is playing catch-up on revenue, it’s ahead of the curve when it comes to mobile. Besides, Twitter wouldn’t be the first company to take its time turning a profit. Tesla Motors “also tapped public markets before it was profitable—and then used that IPO cash to fuel growth and a move to profitability.” Investing in a money-losing company at its IPO may be risky, but it also can be “a catalyst for tremendous gains.”