Memories of Facebook cloud Twitter's IPO

Reuters

By Poornima Gupta

SAN FRANCISCO, Oct 4 (Reuters) - When Facebook Inc was preparing to go public last year, the telephones at GraniteInvestment Advisors rang off the hook as clients called aboutthe social media's company's highly anticipated debut.

In stark contrast, the investment company has not fieldedany calls about Twitter as of Friday morning.

"Not a single call yet," said Tim Lesko, the principal atGranite Investment Advisors, who added that he himself will holdback until he sees a few more quarters of financial results.

"We want to start seeing numbers," he said. "They need tomature a little bit before we would think that we were gettinggood numbers and consistent numbers."

As Twitter Inc races toward the year's most highlyanticipated tech offering, memories of Facebook Inc'sdisappointing 2012 debut are dampening enthusiasm for shares ofthe eight-year-old online messaging service.

Like Facebook, Twitter enjoys strong brand recognition, which typically translates to outsized retailinvestor interest. That was one of the reasons Facebook was ableto raise its IPO price to $38 a share, giving the company avaluation of $100 billion, or about 99 times its 2011 earnings.

Facebook shares plummeted on their first day of trading andcontinued to decline in the following months. They did notregain its IPO valuation until more than a year later, in Augustthis year.

Twitter, which is expected to go public some time beforeThanksgiving, has yet to determine pricing, but investors say itmight come under pressure from its financial backers to go high.Analysts expect the company, which posted a $69 million losslast year, to seek a valuation of at least $10 billion.

"Right now, we think it could be a repeat of Facebook, whereit comes in heavily hyped and is too expensive," said TimGhirskey, chief investment officer at Solaris Group in New York.

And as with Facebook, some investors point to slowing usergrowth and engagement as causes for concern.

From 2012's March quarter to the June quarter of 2013,Twitter's monthly active users leapt 58 percent to an average ofabout 218 million. But users grew just 6.9 percent between thesecond quarter and the first, and 10.3 percent from the fourthquarter to 2013's first quarter.

"Timeline views," a measure of how many times a userrefreshes his or her stream of tweets, grew 10.7 percent in thesecond quarter to almost 151 billion, and 16.1 percent to 136.3billion in the first.

"User growth seems like it has been slowing fairlydramatically for the company," warned Darren Chervitz, directorof research, Jacob Funds, and co-manager of the $42.8 millionJacob Internet Fund.

"Twitter is under a lot of the same pressure that Facebookwas early on, to demonstrate that they really can make money."

WHAT, ME WORRY?

Yet he thinks the company has room to expand its "limited"advertising options overseas, wringing out new revenue even ifuser growth decelerates.

Twitter revealed scorching revenue growth on Thursday, butalso huge losses, a classic technology growth story reminiscentof Amazon.com Inc's own 1997 stock debut, with just $16million in revenue and a loss of about $6 million.

Twitter's revenue almost tripled in the second quarter of2013.

On a cautionary note, the prices Twitter can get for adshave fallen over the past five quarters. The company said thatdecline was the result of a deliberate effort to expand itsinventory and frequency of ads, which in turn drives volumedemand from marketers.

At the end of the day, most investment managers want to seea valuation, or even more financial information, before takingthe plunge.

"This company is barely profitable. Whether it's $10 billionor $12 billion, it's going to trade at valuations that will betough to stomach for a traditional investor," said Chervitz.

"You're going to have to take a leap of faith to getcomfortable with the valuation."

Chris Carter, co-manager of the $521 million Buffalo GrowthFund, advised by Kornitzer Capital Management in ShawneeMission, Kansas, said a "back-of-the-envelope" analysis ofTwitter's IPO filing showed a fair market valuation for Twittermight be $10 billion.

"We're still in due diligence" on the shares, he added.

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