Twitter IPO Roadshow: What Investors Should Ask

Twitter IPO Roadshow: What Investors Should Ask
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Twitter Inc (NYSE:TWTR) executives will begin making their investor roadshow rounds this week, after meeting with banks last week to prepare for the upcoming initial public offering. Analysts from several firms have reviewed the company’s presentation and prospects and provided their take on what investors can expect.

Twitter IPO Roadshow: What Investors Should Ask

Twitter estimates lowered

Analyst Daniel Ernst of Hudson Square Research has reviewed the micro-blogging site’s IPO road show presentation and actually lowered his adjusted earnings forecast significantly. He states in his recent report that his “expectations for profitability growth were too aggressive.” After his review, he lowered his 2014 estimate for EBITDA from $217.8 million to $129.8 million.

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Size matters

Bernstein analysts Carlos Kirjner and Peter Paskhaver of Bernstein have offered an in-depth report on Twitter Inc (NYSE:TWTR). They list several questions investors should consider as they examine the company’s presentation ahead of the IPO. Of course size is an important part of Twitter’s valuation, and its business model is different than Facebook Inc (NASDAQ:FB)’s model even though the two are constantly compared. Twitter is more public, while Facebook is more private. Also Twitter focuses more on interests, while Facebook focuses more on people.

So management will have to provide some indication of how large it’s possible for Twitter to get and what kind of penetration they expect. Will it approach or surpass that of Facebook? If so, then that will be good for revenue. And then the question extends to international markets. Twitter doesn’t report according to geographical regions, and management’s expectations for international growth will be just as important as overall growth.

Understanding the behavior of Twitter’s users

Twitter Inc (NYSE:TWTR) management will also have to provide some details on user behavior and engagement. The company did explain four use categories in its S-1 filing: content sharing, content discovery, following breaking news and live events, and participating in conversations. Kirjner suggests that not all of these uses can be equally monetizable through advertising and believes that content discovery will offer the biggest mother lode of revenue for Twitter.

The micro-blogging site also shared several “average numbers” in its regulatory filing. For example, the “average” user posts five tweets per day and engages in more than 17 timeline views per day. It also said average ad revenue per use was $2.58 domestically during the third quarter. Some have suggested that these numbers are skewed by a relatively few number of power users, which has the potential to reduce Twitter’s revenue per user. The Bernstein analysts believe management will not offer more details on the distribution of user engagement or revenue metrics, although they might offer “directional commentary on the difference between the medians and the averages” in order to allow investors to figure out how many users are truly engaged.

Kirjner and Paskhaver expressed particular concern about the 1% sequential decline in timeline views per monthly average user. They want to know more about the product changes to which Twitter Inc (NYSE:TWTR) attributed that decline and whether this decline will keep happening.

How Twitter will monetize

Of course monetization is also a big issue for investors, and they want to know why revenue per engagement fell off in each of the last six quarters. They say a geographic mix shift to a place where cost per impression is lower could be occurring. Another possibility is a rapid inventory increase combined with limited advertiser demand and an under-developed sales channel. A third possibility is a deterioration of how advertisers view the performance of their ads.

The analysts also question just how many more ads Twitter Inc (NYSE:TWTR) will be able to add to timelines before it becomes detrimental to user experience. Of course management probably doesn’t know the threshold yet, but they expect to see some discussion around this because they believe a few more ads wouldn’t hurt and would raise revenue.

They also question data licensing and whether this could be a second business for Twitter and provide a “long-term platform opportunity.” They point to two possibilities, with one allowing brands to monitor their presence on Twitter and the impact of their advertising and the other using Twitter’s real-time capabilities to track sentiment evolution about companies and their products.

So investors should have plenty of questions to ask Twitter Inc (NYSE:TWTR) management at their roadshow this week. This will be one of the most anticipated IPOs since Facebook Inc (NASDAQ:FB) last year, and there will be plenty of questions by investors wanting to make sure they don’t feel duped this time around.

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