Wall Street remains split on Twitter's prospects

Gerry Shih and Edwin Chan
A portrait of the Twitter logo in Ventura, California in this December 21, 2013, file photo. REUTERS/Eric Thayer/Files

By Gerry Shih and Edwin Chan

SAN FRANCISCO (Reuters) - There was a time when Twitter strove not to end up like Facebook.

As the social media phenom prepared to debut in November, the last thing it wanted was a repeat of its larger rival's rocky IPO and subsequent sell-off. Now, the one-time Wall Street darling's inability to replicate its bigger cousin's success in mobile and online may be what holds it back.

Wall Street remains divided over Twitter as the seven-year-old company prepares to unveil only its second set of quarterly numbers on Tuesday. Eleven of 31 investment analysts polled by Thomson Reuters rate it a "sell," outnumbering the seven who deem it a "buy." The rest have a hold rating or its equivalent.

That's a stark contrast with Facebook and Google, neither of which has a single sell rating to their name. A strong quarterly showing from Facebook last week reflected an amped-up online and mobile advertising market that's likely to have given Twitter a boost.

Yet longer-term, investors remain divided over whether Twitter can ever be as mainstream as Facebook.

"When Facebook was Twitter's size, Facebook had a 35 percent operating margin. Twitter's is negative 10," said Hudson Square's Daniel Ernst, who has a sell rating on Twitter. "It's an inefficiently structured operation addressing a narrow audience."

Chief Executive Dick Costolo, the architect of Twitter's then-fledgling monetization efforts two years ago, appears to have acknowledged that longstanding criticism with a number of recent moves to try and bring the service into the mainstream.

He's introduced Facebook-like user profiles; given photos more prominent placement in tweet-timelines; and allowed people to "pin" articles or pictures like Pinterest, to name a few.

Many of those efforts came after Twitter in January stunned Wall Street by reporting its slowest pace of user growth in recent company history - just two months after its splashy coming-out party.

Since then, Twitter has lost 33 percent of its market value. Yet at $26 billion, the company still trades at 37 times sales, against 19 for Facebook, which boasts almost six times as many users as Twitter.


Indeed, bullish analysts argue that the company is on the cusp of realizing its larger potential. Five months after its debut, Twitter stock remains above $40, versus its $26 offering price.

Unlike Facebook, which was caught flat-footed in 2012 when its users migrated to mobile devices, Twitter has always seemed better-poised to make money off of its smartphone user base.

The company secured a strategic asset last September when it splashed out $350 million on MoPub, an advertising network that distributes ads within hundreds of mobile apps.

MoPub has delivered several technological advancements in recent weeks, including the ability for advertisers to execute cohesive campaigns by placing ads within apps as well as into the Twitter stream simultaneously.

Bullish Twitter analysts say there's more to come.

Although rivals Google and Facebook dominate mobile advertising, Twitter's ad machine may get a jump-start once it places targeted ads in apps, tailored for users and their interests, which will extend its ad reach far beyond its 241 million users.

Indeed, its advocates on Wall Street argue that Twitter is best-placed to grab a significant slice of mammoth TV ad budgets because of its growing presence as the "second screen" that TV audiences turn to online, to weigh in on their favorite shows.

"Twitter is one of the best plays off two of our 2014 Internet growth factors: increasing mobile materiality and the online migration of TV ad budgets," RBC Capital Markets analyst Mark Mahaney, who has an outperform and $60 price target on the stock, argued in a research note.

But the company "needs to prove two things: that it can successfully increase its reach with advertisers; and that it can successfully increase its user base and engagement levels."

Analysts expect Twitter to have lost almost $159 million, or about 3 cents a share, on revenue of $241.47 million in the January-March quarter, according to Thomson Reuters I/B/E/S.

(Editing by Bernadette Baum)