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Twitter IPO Investors Need to Weigh Past, Present and Future

NEW YORK (TheStreet) -- The rising price of Twitter's initial public offering, expected for Thursday, should cause prospective investors to take a step back and consider whether they are willing to invest in the micro-blogging site given its past, present and future.

The IPO has a host of challenges for prospective investors, especially those who won't be getting a piece of allocations from lead underwriter Goldman Sachs (GS - Get Report) and co-underwriters Morgan Stanley (MS), JPMorgan (JPM), Bank of America (BAC) when the deal prices on Wednesday.

Given Twitter's current IPO pricing of between $23 and $25 a share and reports the 70 million share offering is oversubscribed, there is also reason to believe the company's shares may surge in their first day of trading.

Twitter inevitably will begin trading at a price that far exceeds any earnings multiple given its accumulated losses, and the company's revenue streams will be hard to value considering there are only two years of data for investors to discount. Management change at the micro-blogging site may also indicate Twitter's business model remains in flux.

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Any one snapshot, whether it is the most recent earnings results Twitter lists in its amended S-1 filing, or some grand vision of the company's future, are likely to prove an incomplete way of understanding the share listing. A better approach has to involve discounting Twitter's present earnings with building an understanding of how the company can grow and evolve in coming years.

Twitter will IPO as a faster-growing media property than larger competitors such as Facebook (FB - Get Report) and Google (GOOG), and it holds a more universal appeal than LinkedIn (LNKD). Generally, analysts and investors seem to agree Twitter is pricing its offering at fair, if not attractive multiples, to its expected revenue and growth.

According to SunTrust Robinson Humphrey analyst Robert S. Peck, Twitter's pricing implies a multiple of 10 times the company's enterprise value to revenue in 2014 and a multiple of 6 times EV/revenue in 2015, lower than the average 17x multiple of Facebook, LinkedIn, Yelp (YELP) and Zillow (Z).

Twitter's expected 80% compound annual revenue growth rate of 80%, meanwhile, is higher than its peers. The company's EV relative to its monthly average users (MAU) comes in a $53, a contrast to the average EV/MAU multiple carried by Facebook and LinkedIn.

Of course, if Twitter's shares surge from its IPO pricing, it will stretch all of the company's comparable multiples.

Jim Cramer, founder of Thestreet, has set some hard and fast rules for investors given his expectation that this will, indeed, be a hot IPO.  Cramer believes Twitter has a path toward revenue growth and profitability that investors can trust, however, at some point investors may need to draw a line on valuation. Investors should balk at Twitter shares at a market capitalization of over $20 billion, Cramer said on Wednesday.

That valuation balances the company's expected potential and accounts for the company's still uncertain share count.

Santosh Rao, an analyst at Greencrest Capital said in a Tuesday telephone interview that Twitter's current IPO pricing is "fair" and "makes sense" given a limited float when compared to Facebook.

The analyst expects the company's stock to pop in day-one trading to above $30 a share. At $35 a share, Rao says investors should wait for a pullback and the analyst generally believes investors can wait out the share listing entirely and hold out for further information in Twitter's fourth-quarter earnings, if they so choose.

Rao, however, cautions investors from waiting for Twitter to definitively prove itself. Investors that believe Twitter's platform is strong should invest early and monitoring trends such as user growth and monetization of international users, according to Rao.

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