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Twitter IPO Ahead: Investors Go Long On Short Messages

THE BUZZ

With its initial public offering expected to launch in stock market trading Thursday, social networking phenomenon Twitter (TWTR) stands to make plenty of money from investors. But how will it make profits in the long term

Many of the stocks in the Internet Content industry group are relying more heavily on mobile advertising than they have in the past, with varying results.

Mobile-focused Twitter is the newest entrant to the hot group, ranked No. 5 of 197 that IBD tracks. The group is home to heavy hitters in Internet advertising, including Google (GOOG), Yahoo (YHOO) and Chinese search engine Baidu (BIDU), along with social networks LinkedIn (LNKD) and Facebook (FB).

Twitter, in its S-1 prospectus filed with the U.S. Securities and Exchange Commission, says its mission is to provide a public platform for "self-expression and conversation in real time.

THE COMPANY

Users log on to free-to-use Twitter and post short messages that, typically, anyone can then see at Twitter.com or via a mobile app.

The company says: "As a result, when events happen in the world, whether planned, like sporting events and television shows, or unplanned, like natural disasters and political revolutions, the digital experience of those events happens in real time on Twitter.

Users view a continuously updated feed of messages, or "tweets," from everyone they "follow." Lively text conversations happen along with sharing of links to photos, news reports and blog entries.

Like rival social network Facebook, Twitter makes money selling advertising targeted to users based on what they post, their location and the content they like, among other collected data.

Incorporated in April 2007, Twitter is technically a microblogging platform that lets users post messages up to 140 characters long. Twitter's CEO is Richard Costolo, who joined as chief operating officer in September 2009 from Google.

Jack Dorsey, a Twitter co-founder and CEO at payment-processor Square, is a director on the board. Evan Williams, another co-founder, is on the board as well.

Dorsey and Williams, with Noah Glass and Biz Stone, formed Twitter in 2006. They set the 140-character limit for tweets by what fit into a cellphone text message.

"The mission we serve as Twitter Inc. is to give the power to create and share ideas and information instantly without barriers," the company says in regulatory filings.

With more than 100 million daily users, Twitter grew to 230 million monthly users in Q3 and a history-topping 350 billion tweets.

RISK/CHALLENGES

Like rival Internet advertising companies, Twitter is hoping that mobile advertising will drive sales growth in the future.

That's worked out for Facebook, which has now posted two quarters of strong mobile sales that contributed to its bottom line and helped drive Facebook stock higher. When it went public in May 2012, Facebook didn't yet have mobile advertising. Twitter already does have mobile ads, yet the company is at this point unprofitable.

In its most recent quarter, more than 70% of Twitter's advertising revenue came via mobile, the company says. It adds that, in the future, Twitter users might start using new applications that are "more difficult to monetize.

Mobile advertisers worldwide are expected to spend $16.65 billion this year, and Twitter's getting about 1.9% of that vs. Google's 53.2% and Facebook's 15.8%, according to eMarketer research.

Twitter will grow only if users stay interested, says Morningstar analyst Rick Summer.

"For investors who believe Twitter will become ubiquitous like Facebook, the investment case is unusually strong," wrote Summer in a pre-IPO research note.

THE RESULTS

In the three months ended Sept. 30, Twitter posted revenue of $168.6 million, a little more than double what it saw in the same period a year earlier. But as with many startups that attract a lot of users quickly, growth has tapered, from a 212% year-over-year gain logged in the September 2012 quarter.

The company has yet to post a profit. Its losses have accelerated as it has invested in new acquisitions, new hires and new technology. Its non-GAAP net loss in Q3 was $17.2 million vs. $12.7 million in the year-earlier period.

The "the exciting point about Twitter is that it is still in its monetization infancy," wrote Susquehanna Financial Group analyst Brian Nowak.

PROCEEDS

If Twitter prices at the high end of its expected range and sells all 70 million shares plus the allotted 10.5 million extra that underwriters have an option to buy, the company would raise about $2.01 billion with its initial public offering. The company says it'll spend $215 million to $235 million on capital expenditures in 2013, but hasn't yet announced detailed plans for the rest of the proceeds. It says it may make acquisitions or use some of the money for general corporate purposes.

The company on Monday boosted its expected range to $23 to $25, indicating that there's strong demand for Twitter stock.

THE MANAGEMENT

Richard Costolo Chief executive officer Costolo, 50, became CEO in October 2010 after serving as COO for about a year. He was a co-founder and CEO at FeedBurner, an RSS subscription company, which was acquired by Google in 2007.

Ali Rowghani Chief operating officer Rowghani, 40, has been COO since December 2012. He took over the job after serving as the company's CFO since March 2010. Rowghani held several roles at Pixar Animation Studios from June 2002 to March 2010.

Mike Gupta Chief financial officer Gupta, 42, became the CFO in December 2012, about a month after joining Twitter as vice president of corporate finance and treasurer. He previously held roles at games maker Zynga and Yahoo, where he was senior vice president of corporate development and finance and the firm's chief treasury officer.

Twitter

San Francisco, Calif.

(415) 222-9670 Lead underwriters: Goldman Sachs, Morgan Stanley, JPMorgan Offering price: $23-$25 Expected date: Nov. 7 Ticker: TWTR