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Twitter got investors excited last week when it announced -- via Twitter, naturally -- that it had filed an S-1 with the SEC, the first step to an initial public offering. Look, I get the excitement. Twitter has been a revolution in how we communicate, with more than 200 million users blasting out rapid-fire comments 140 characters at a time.
Twitter has helped spread news in warzones, and it's helped spread celebrity gossip on kids' cell phones. It's also become a bit of a phenomenon in the investment world; brevity counts for traders, so the 140-character limit works perfectly for broadcasting trading ideas. Some funds are even using Twitter data to drive trading algorithms right now.
But none of that changes the fact that you shouldn't buy Twitter on day one. It makes sense to avoid this stock, just not for the reasons you think. Let me explain.
Not a Bad Model
First of all, Twitter doesn't have a bad model. Really.
There's one very simple sniff test that I use when I look at social media stocks: Does the company earn its revenue by helping its end users find what they're looking for?
>>5 Stocks Under $10 Set to SoarLinkedIn (
LNKD) is a perfect example of that: The professional network gets 75% of is revenue paid for by users who are posting open jobs or looking for jobs. In other words, it makes money by helping users do what they came to the site to do. And LinkedIn has been the poster child for successful post-IPO performance; shares are up 167% since their first trade in 2011.
Contrast that with
Facebook earns most of its revenue by distracting users from stalking their friends and getting them to click ads instead. As I see it, that makes the site inherently less valuable. (For its part, FB has been changing that in recent quarters -- but we're not talking about Facebook today).
Twitter's core ad revenue is more in line with the point of the microblogging service; discovery is an integral part of Twitter (far more than at FB), and advertisers are paying for the privilege. Even better, around half of Twitter's ad revenue is coming from mobile ads right now, a metric that Facebook previously caught heat for missing.