Twitter Inc (NYSE:TWTR)’s debt has been assigned “junk” status by the U.S. rating agency Standard & Poor. The micro-blogging firm is going forward with its acquisition strategy even when its earnings growth was slow, which triggered the low rating.
Twitter spends aggressively
The rating agency stated that the micro-blogging site issued debt worth $1.8 billion in September, and IOUs sold to investors in exchange for interest were worthy of a “speculative” rating of BB-, three notches below the company’s investment grade.
“The company is investing very aggressively in growth. Depending on the level of business reinvestment, Twitter may not generate positive discretionary cash flow until 2016,” S&P said in a note.
Twitter announced that it will set up an office in Hong Kong to boost its advertising and reach, even though the site is restricted in Mainland China. In the third quarter, Timeline views per user dropped 7%. Views are a significant metric to track engagement despite the rise of 23% in user base growth. Twitter has stated that its revenue for the fourth quarter will be below the expectations of $448.8 million.
S&P stated that it can give a higher rating to Twitter if the company diversifies its revenue stream, launches new products and maintains its market share, along with improving its profitability and cash flows. However, it does not rule out the possibility of the company’s rating dropping even further.
Long-term growth in question
The ratings of S&P have splashed cold water on the enthusiasm following Twitter Inc’s first Analyst Day on Wednesday. The company’s top executives talked about their plans regarding the company’s growth strategy to settle down the worries of investors about Twitter’s long-term prospects.
At the event, company executives talked about various tests Twitter is running at present, such as video sharing and curating feeds for the most relevant content, which will apparently position it parallel to rival Facebook with five times more users. After the event, analysts had a greater sense of confidence, believing that the company will be able to bring in product changes faster and make money from its extended audience groups.
After the news of the revised rating, Twitter shares dropped by approximately 6%. Shares of Twitter surged 7% on Wednesday after the company stated that it is working toward designing additional mobile applications apart from its messaging service and video app. Its shares have lost 37% so far this year.