NEW YORK (TheStreet) -- Twitter (TWTR) took a lot of headline heat after Standard & Poor's slapped a junk-bond rating on the $1.8 billion of convertible debt the microblogging service issued last month. But the logic behind the rating is actually pretty good news -- for Twitter's stock.
The company's new BB- rating, three steps below investment grade, is hardly a death sentence. It means Twitter is "less vulnerable in the near-term but faces major ongoing uncertainties to adverse business, financial and economic conditions." And the things that make S&P wary of the bonds, which were oversubscribed when they were brought to market, are the very things equity investors should like about Twitter.
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Specifically, S&P's report makes the simple, rather obvious observation that the company's very active capital investment plan raises its financial risk. Which it does. The thing is, investing in innovative new products has also been where Twitter's growth and emerging profitability has come from. (In the first nine months of the year, Twitter's sales rose 118% to $924.9 million and profits before interest, taxes, depreciation and amortization were about $160 million, with EBITDA profit margin reaching 19% in the third quarter).
"We assess Twitter's business risk profile as "fair," reflecting its unique real-time social networking service at scale; strong brand recognition; very large audience base; [a] service which is well-suited to mobile environment; and healthy EBITDA margin," S&P analysts led by Andy Liu wrote. "These considerations are balanced by intense competition with larger competitors that have more resources and high new-entrant risk. ... The company will need to make continual, sizable investments in its products and services to ensure growth and innovation, as well as maintain its relevance with its users."
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