Many investors look past Twitter's losses, for now

Reuters

By Olivia Oran and Jessica Toonkel

NEW YORK, Oct 16 (Reuters) - Investors willing to bet onTwitter Inc will have to overlook mounting lossesand slowing user growth - and have faith that the eight-year-oldInternet messaging company can transform a household name intoadvertising dollars.

Fund managers who were optimistic about Twitter's financialprospects shrugged off its latest $65 million quarterly loss asstandard for startups chasing growth, pointing instead torevenue growth that more than doubled.

But others warned of the risks of investing in a companywith a management that has yet to prove it can generate aprofit.

"It's worth having exposure to a name like Twitter, althoughyou have to take a conceptual leap of faith with regard tovaluation, and say it's a unique franchise that isn't likely togo away," said Karl Mills, president and chief investmentofficer for private investment adviser firm Jurika, Mills &Keifer in San Francisco.

"Like Twitter, Amazon was in investment mode for a longtime. They still are, so that doesn't worry me."

Twitter's latest IPO filings showed its net loss in theSeptember quarter tripled to almost as much as it lost in all of2012.

As Twitter races toward the year's most highly anticipatedtech offering, memories of Facebook Inc's disappointing2012 debut threaten the eight-year-old online messagingservice's own splashy coming-out party.

Like Facebook, Twitter enjoys strong brand recognition,which typically translates to outsized retail investor interest.That was one of the reasons Facebook was able to raise its IPOprice to $38 a share, from an initial range of $24 to $35 ashare. That gave the company a valuation of about $100 billion,or about 99 times its 2011 earnings.

Facebook shares promptly plummeted on their first day oftrade. They didn't regain their IPO valuation until more than ayear later, in August of 2013.

Twitter, which is expected to go public in November, has yetto determine pricing, but investors say it might come underpressure from financial backers to go high. Analysts expect thecompany to seek a valuation of at least $10 billion.

Unlike Twitter, however, Facebook and professional socialnetwork LinkedIn Corp both were profitable when theydebuted. Twitter's still cloudy outlook makes some investorsnervous.

"I want something to be generating income. If they can'tmake the transition from capturing market share to generatingincome, they're going to run out of money eventually," saidBrian Frank, portfolio manager for Frank Capital Partners in NewYork. "But at the same time, if they stop investing in growth,they're going to lose users and risk people not staying engagedwith the brand."

"The Twitter IPO could mean the top of the social mediapeak," he added.

PEAKED?

Financial advisers are managing clients' expectations.

"I am telling clients to give it some time at the IPO andsee how it does first," said Alan Haft, a financial adviser withCalifornia-based Kelly Haft Financial. "If they are gamblers andwant to make a few bucks out of the gate, fine, but if they areinvestors they should hold off."

The potential demand from retail investors remains unclear.But several investment advisers interviewed by Reuters said theyhad already received calls from interested clients - though noton the level seen when Facebook became one of the first of thesocial media giants to go public.

Nancy Caton, managing director of Carson Wealth ManagementGroup's San Francisco Bay office, was surprised about how littleinterest clients have shown in investing in Twitter, given thefrenzy she saw around Facebook.

"With Facebook, it was crazywe were flooded with calls,"she said. "Maybe they learned a lesson."

But Twitter does not have the same presence among Caton'sclients, who are mostly in their 60s, she said. "A lot ofgrandparents are on Facebook, that's how they get pictures oftheir grandkids," she said. "But I might have one client thatuses Twitter."

Still, Twitter has no shortage of believers, includingSunTrust Robinson Humphrey analyst Robert Peck, the first toslap a "buy rating" on the stock and who on Wednesday echoed hisprevious optimism about the company.

Twitter's fledgling advertising model is centered around the"promoted tweet" and massive marketing campaigns built aroundtelevision-viewing. The promoted-tweet tactic has since beenreplicated by rivals like Facebook.

Its more nascent second-screen approach has also won favoramong media and entertainment executives because they encourageaudience interaction on mobile devices and open a new channelfor advertising as well.

"Twitter has a mobile strategy, and it seems like they'reahead of Facebook in mobile," said Dan Veru, chief investmentofficer at Palisade Capital Management LLC in New Jersey, with$4.5 billion of assets under management.

In fact, says one Silicon Valley investor, growing lossesmay just be good business.

"Increasing losses is not a problem if the unit economicsare sound. With profitable unit economics, it is financiallyirresponsible NOT to run losses, assuming you have access tocapital," said David Cowan at Bessemer Venture Partners, whoseinvestments include LinkedIn Corp. "Having said that, I have notexamined Twitter's financials to assess the unit economics."

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