Twitter Treading Warily on Road to IPO

Can the company tweet past Groupon’s graveyard and Facebook’s flop?

The White House plans to promote #My2K on Twitter and other social media.
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"They will do their IPO at exactly the right time—in roughly 12 months when they have good quarterly earnings visibility, are still growing at high double-digits, and after they've worked out some monetization experiments behind the shades that come with being a private company," says Hamadeh.

The company does not have a great need to raise cash since it has an estimated $500 million on hand to fund its own operations and pay for investments that fit its growth strategy. When Google was at a similar stage in 2003, it made a $100 million deal that assured its future for years to come, buying Applied Semantics, which became the key component of its AdSense and AdWords applications that wired a virtual cash machine to its powerful search engine by giving it a way to turn its billions of Google searches into paid clicks.

Twitter is at a similar crossroad. Indeed, it shows every sign it can monetize more of its tweets, and already has started to do so. The research firm Greencrest recently estimated that Twitter's overall revenue from a mix of strategic partnerships and its own advertising sales will reach $1 billion next year. But investors will remember that a year ago, Facebook looked like a solid bet to justify its towering stock valuation. In a fast-changing environment back then, the disruptive power of mobile media erupted at the time Facebook was offering its stock to the public. When it did, Facebook looked like it was caught with its hoodie down. Mobile was overtaking page views so quickly that it was eroding the advertising premiums Facebook expected on its traditional Internet ads.

Some fear Twitter might face similar unexpected challenges. Large advertisers are awed by its broad reach and its growth as a global company, although there are worries that Twitter could hit new barriers to future expansion, says Greencrest analyst Max Wolff. Tweets are even less predictable than Internet advertising because the tweeting audience decides when and where the one-liners flow. "Chrysler doesn't want to sponsor car ads that run with car tweets about gruesome accidents, which is what people might be tweeting about," Wolff says.

Twitter also faces competitive threats from established players like Facebook, which could expand its messaging and other Twitter-like tools. Google also remains a force as more users connect to its Google Plus social media platform. Either of the big competitors could use their already immense user base to build social media that mimics Twitter's or, less directly, simply target the same advertisers as overall competition heats up. Google and Facebook are ahead of upstart Twitter when it comes to measuring and marketing to their users. Measurement and strong user-based data has also fueled growth for LinkedIn, which provides the only big success model for a social-media public share offering. Its shares have tripled in value since its IPO a year ago.

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With Twitter's strong user base, the threat from other companies is manageable, says Wolff, who also sees great potential for surprises on the upside. Twitter is actively seeking ways to add revenue sources, as Google did with its then-novel plan to charge for search clicks as it did with its AdSense, and Facebook, with less success, did with its strategic partnership with Zynga. Wolff cites a recent deal Twitter made with advertising-measurement giant Nielsen in which the companies will partner on tie-ups that link social media ventures and possibly other broader media ventures. Wolff sees strong possibilities to make more use of the huge Twitter followings that athletes and other celebrities already have, turning their tweet-enhanced media appearances into premium prime-time advertising venues.

"They have a ton of traffic that they need to monetize," says Wolff. "So if you think about it, it is really not that much of a problem." Not for the venture capitalist and early-stage investors, at least. But when it comes to wooing public investors, who crave the certainty of long-term stability, those issues are more of a worry. Twitter has time to solve them—at least for the next year, which in social media terms is a very long time.