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An Investor's Guide to the Twitterati


You may be surprised to learn who's on Twitter, and who's not.

Do you tweet?

If the question gives you the uncomfortable feeling that you're out of the loop, you're not alone. In fact, most of us have not tweeted. If you're an American and are over age 29, it's quite unlikely that you've ever done it.

In spite of the fact that Twitter (NYSE:TWTR) is a household name, and that it has caused many humans to begin tweeting in public, it is still not quite the mass phenomenon it seems, at least in context of the massive numbers possible in global Internet reach.

As it prepares for its debut as a public company on the New York Stock Exchange this week, that fact is Twitter's strength -- or its weakness, depending on your view of this company as an investment.

At least for now, the "Twitterati," as the site's user base is sometimes called by people who are in the loop, or like to think they are, is an exclusive and, at least in comparison to Facebook (NASDAQ:FB), small group.

Only 16% of American adults use Twitter, according to a survey released this week by Pew Research. The survey found that a bit over half of those Americans have used Twitter as a source of news. That is, they tend to learn of a breaking news event on Twitter, pass it along, react to it and talk about it on Twitter.

Those Twitter news consumers tend to be young, with 45% between 18 and 29 years old. They are better educated and more affluent than the US population as a whole, or their counterparts on Facebook. They also tend to be accessing Twitter on their mobile devices.

All of the above is catnip to marketers, a dream audience to target.

But there's one thing Twitter lacks in comparison to Facebook, and that's sheer numbers. The size of its audience is by no means negligible, but it may not yet be enough to draw the kind of big-name sponsorship dollars it needs to succeed.

Twitter had 190 million monthly unique visitors as of May 2013, according to its own figures. That "monthly uniques" label seems like a reasonable definition of "active" users, although its own count of "active registered Twitter users" was 554,750,000, with 135,000 new users added daily. Even that larger number is about half of Facebook's membership.

Surprisingly, users outside the US represent more than three-quarters of Twitter users. Its international user base has more than doubled in the past year, compared with a 50% growth in the US, according to the New York Times. Brazil and India have particularly fast-growing Twitter bases.

Its success in mobile-that 140-character format seems tailor-made for it-could help it continue to grow globally.

But there's one problem, at least for now. Only 26% of its revenue comes from those sites outside the US. Its automated advertising purchasing system has not yet launched abroad. And international rollouts are not easy, cheap or fast. (See Groupon (NASDAQ:GRPN) for details.)

So, add in the plain fact that Twitter is not yet turning a profit. What the analysts are saying about Twitter's business right now boils down to either the glass-half-full "plenty of upside," or the glass-half-empty "wait and see."

In the lead-up to its initial public offering, Twitter's plan seemed cautious and even modest. Suddenly, with hours to go before the launch, the company, its underwriters, and the analysts all seem to be running a high fever.

On Monday, the company increased the price range for its shares to $23 to $25 each, from $17 to $20 each, reportedly because of strong interest shown during its national "road show" for institutional investors.

That would value the company at up to $13.6 billion, or about 12.5 to 13.6 times its forecast 2014 revenue of $1 billion. Facebook and LinkedIn (NYSE:LNKD) trade at about 12 times earnings.

The analysts' target prices are all over the map, from $26, set by Morningstar analyst Rick Summer, to $54, by Topeka Capital's Victor Anthony.

But perhaps the final word should go to James Gellert, CEO of Rapid Ratings. His firm's analysis of Twitter's financials puts its "risk profile" at 92% in points of comparison with Internet bubble-era IPOs. That's far higher than Rapid's ranking of Facebook's, at 33% at the time of its own IPO. Rapid Rankings awards Twitter a "financial health rating" of 19, on a scale of 0 for worst to 100 for best.

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No positions in stocks mentioned.
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