Twitter's Biggest IPO Hurdle Will Be Its Growth Problem

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Twitter CEO Dick Costolo

Twitter has about 240 million users and hasn't reached it user-growth targets, according to AllThingsD.

That's going to be a problem when it finally discloses its S-1 IPO papers with the SEC: Wall Street likes to see a big growth story, and Twitter's may already be behind it. The declining user growth at Facebook crushed that company's stock after it went public last year, and it took 12 months or so for investors to realize that simply because the user base was slowing down it didn't mean the monetization of that user base was over.

Twitter had hoped to hit 400 million users by the end of 2013, but it may only reach about 260 million, ATD said.

The challenge Twitter will have in its investor roadshows and presentations before it goes public is to talk separately about revenue and users. Most people assume they go together somehow — the more users you have, the more likely you can sell ads against the content they create, the more money you make.

But as Facebook has proven, it's not the user base that drives revenue, it's the revenue products. Last year, Facebook stock fell to lows of around $18. One bank had a price target on FB of just $15. It's now trading near $45. Wall Street got this wrong because it had assumed, from looking at Facebook's slowing user base, that its revenues would slow likewise.

Then, in Q2 2013, Facebook reported revenues of $1.81 billion on expectations of $1.62 billion, fuelled largely by mobile revenue growth, which nearly doubled to ~$656 million. Now there are analysts with price targets of $50 for FB.

If Twitter does have a user growth problem, then it will face similar headwinds once it goes public. And like Facebook, it may already have separated revenue growth from user growth.

Twitter recently acquired MoPub for $350 million, instantly giving it an ad exchange and a supply-side platform of publishers who can serve ads that target Twitter users after they leave Twitter. That ad offering is arguably more advanced than Facebook's. Facebook does not yet have a mobile ad network outside of Facebook.

The MoPub ad inventory has yet to come online at Twitter. When it does, revenue growth will look spectacular. The question is, will investors be able to understand that revenue growth and user growth are two separate things that don't always control each other?



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