Twitter Listing: Concerns over Profitability, Valuation and Idling Users Point to Tough Road Ahead

As micro-blogging site Twitter is due for its debut trading on 7 November, investors and experts have different opinions about the future of the company. Some of them are concerned about the high value of the company that is yet to make a profit, while others say it would see exponential growth.

The short message service priced its shares at $26 each, higher than the IPO price range of between $23 and $25. At that price, Twitter has a market value of more than $18bn (£11bn, €13bn), the highest market debut for a technology company since Facebook went public in May 2012.

Earlier, the company raised its IPO price range from between $17 and $20, amid high investor demand. The number of shares offered remains at 70 million, which means at the top of the range Twitter would raise $1.75bn. An extra 10.5 million shares are available to the underwriters as an overallotment option.

Unlike many of its rivals which preferred tech-friendly Nasdaq stock exchange, Twitter opted the New York Stock Exchange (NYSE) for its listing. Nasdaq had earlier suffered a blow to its reputation due to delays and glitches during Facebook listing. Nasdaq was also hit with the SEC's largest ever financial penalty of $10m.

In order to ensure a smooth listing and debut trading, the NYSE has already tested trading of Twitter's shares, which will trade under the symbol 'TWTR'.

Concerns

Having started its 140-character-long message service seven years ago, Twitter currently has about 230 million users. Despite witnessing high revenue growth, the company is yet to make a profit.

In the third quarter of 2013, the company's losses widened to $64.6m from $21.6m a year earlier. Meanwhile, sales more than doubled in the third quarter to $168.6m.

The growing number of inactive users is another headache for the company. A recent poll by Reuters/Ipsos showed that more than a third of registered users do not use the service at all.

Given the growing number of social networking sites looking to list on stock markets, Twitter is currently overvalued, according to some analysts.

"Twitter is also entering a more crowded market than Facebook, and there are many more queuing up to join," Aswath Damodaran, a finance professor at New York University's Stern School of Business, told BBC.

"The valuation is reasonable if the company can continue to grow its user base, generate cash flow from advertising, and successfully fend off the competition. If not, then it will be remembered - or forgotten - like many of the 1998-99 tech bubble companies, and generate plenty of tax losses for investors," Chris Orndorff, an official at Los Angeles-based Western Asset Management, told BBC.

Growth Expectations

Nevertheless, some analysts predict that the micro-blogging website's value will increase to more than $20bn in a few months after the IPO.

According to Martha Lane Fox, co-founder of the travel website astminute.com, Twitter could make more money in the future and maintain its market valuation.

She noted that Twitter will benefit from its rising advertising revenue from mobiles and a number of interesting deals and partnerships.