With the release of financial details from Twitter ahead of its IPO, analysts are raising some red flags about the long-term potential of the social media platform.
Among the concerns are the company's ability to raise revenues through mobile advertising and the number of Twitter users that are actually bots, which generate automated tweets and spam that don't always represent real users. The company's disappointing revenue figures are also a concern.
Twitter announced yesterday that it plans to raise $1 billion US through its initial public offering, though the timing and share price details are not yet finalized.
Its prospectus reported that the company's revenue almost tripled to $316.9 million in 2012. In the first half of 2013, it posted revenue of $253.6 million but had a loss of $69.3 million.
The company has an accumulated deficit of $418.6 million, a shortfall that is larger than its revenue last year of $316 million. It has never made a profit and predicted there might be further losses ahead.
The inevitable comparisons are being made to Facebook, which had $1.1 billion in annual revenue when it listed and a profit of $302 million.
Losses a 'non-issue'
The losses are "a non-issue," said Brian Wieser, analyst at Pivotal Research Group. "It would have been a surprise if they had a profit."
Looking forward, Twitter plans to be heavily reliant on advertising revenue, with 87 per cent of its income to come from ads in in 2013 alone.
But Twitter gets the most use on cellphones, and ad revenue on mobile is actually circumscribed as the cost of such ads is cheaper than advertising that is viewed on personal computers and subject to the whims of a competitive marketplace.
The price of Twitter ads has actually fallen over the past five quarters, part of a strategy to attract more advertisers, especially small- and medium-sized businesses and international clients, it said.
Risks over ad revenue
In its prospectus, the company acknowledged the uncertainty of the online advertising market.
"Advertisers will not continue to do business with us, or they will reduce the prices they are willing to pay to advertise with us, if we do not deliver ads in an effective manner, or if they do not believe that their investment in advertising with us will generate a competitive return relative to alternatives, including online, mobile," it said.
But the conventional wisdom is that mobile markets are only going to grow, and that looks good on Twitter.
New York-based analyst Tom Forte believes that Twitter has great potential for growth, in part because it's fortunes are linked to the mobile ad market.
"I think Twitter is much better suited to succeed than Facebook was, because Facebook went public and the advertising market has been validated by Facebook’s success," he told CBC News. "They’re definitely benefiting from the success that Facebook has had there."
There are numerous questions about false Twitter accounts. Twitter claims to have 215 million users worldwide, but numerous admissions from celebrities and others that they buy Twitter followers cast doubt on that figure.
Close followers of the technology note the rapid re-tweeting of some types of tweets, which might be the work of automated systems or of robotic spammers.
Concern over spam accounts
In the IPO documents made public Thursday, Twitter estimated that "false or spam accounts" make up less than five per cent of its traffic but admitted that automated accounts that send tweets regularly are considered active users.
Forte believes these phantom users could mean a lower stock price for Twitter, but he sees plenty of potential for growth from a platform that has such a low number of users.
Twitter also said it expects capital expenditures of $225 million to $275 million this year as it attempts an ambitious global expansion.
Gartner analyst Brian Blau said the company's expenditures "seemed to be a little bit higher than what I had imagined," but he said it wasn't "totally out of whack" for a growing company.
Still, investors are always keen to get in on the ground floor of a tech titan, and an attractive stock price might draw interest.
Although Facebook started the game with better financials, it took more than a year to rise above its original stock price of $38 US.
After releasing the prospectus, Twitter can start wooing investors as early as Oct. 24 or listing as early as the second week of November. It has chosen the ticker symbol TWTR.