Much of the analysis around Twitter's (NYSE:TWTR) IPO misses the critical factors for the company's long-term success. Revenue in 2013 and whether the company is profitable are unimportant considerations for a business at this stage of development. The company's worth depends on long-term drivers and trends that the Risk Factors section of the S-1 filing captures but current financial results do not.
Although the format of the S-1 and other filings asks companies to present Risk Factors as potential causes for downside, you should see them as drivers, positive and negative, of the company. And in fact, Twitter's track record and momentum suggest that these "Risk Factors" are actually the company's greatest strengths and opportunities for success in the long run. Investors looking for upside should focus on the Risk Factors in the S-1.
See here my full analysis of Twitter's Risk Factors next to the S-1 filing itself in the SEC Live filings tool. This article lists only the first three factors as examples. Read the S-1 for yourself and think again whether Twitter's Risk Factors should worry you or excite you.
Factor 1: User base and user engagement
The logic how the first Risk Factor could make shareholders suffer is clear. If there are no users on Twitter, then there is no one to click on ads. No advertisers buy ads and there is no revenue for Twitter. But what if it works out the other way? What if the company does succeed in growing its user base above what everybody expects? More users than expected means more revenue and profit than expected.
The sentence in Highlighter yellow is not strictly negative or positive. It just explains one of the variables that determines Twitter's profit. In fact, the sentence before it shows that Twitter achieved enviable user base growth of 39% in the span of a single year. The explanation of the risk factor actually reassures that the company is doing well.
Factor 2: Content Generation
The S-1 puts it clearly here too - Twitter relies on its users to generate content. If they stop doing that and there is no interesting content on the platform, there is no reason for anyone to visit. Well, Twitter is the place for all key influencers to distribute content - news, commentary, analysis - whatever their main platform. For example, Seeking Alpha wants to get visitors to its website and apps and Twitter is a great way to reach its existing readers and new ones too. The trend is for more and more influential people and organizations to set up profiles and gather followers, rather than the opposite. And once you have millions of followers, would you forfeit reaching them via this engaging and cheap channel? Influencers and wanna-be influencers, from President Obama to your local supermarket, say "no".
Factor 3: Business model relies on advertising
Let's put this statement into perspective. Just a few years ago, many wondered what business model Twitter could ever have. Some thought that it would never be a business. Well, now the company has a business model - online advertising. But not one that relies on internally generated content as news websites do, for example. Instead, Twitter is a platform that brings together content generators, content consumers and advertisers. Just like Seeking Alpha. We know that online advertising platforms can be profitable (Facebook) and even very profitable and for a long time (Google).
The Risk Factors section of Twitter's S-1 actually reveals the company's opportunities. The offering price is still not clear to assess whether the Twitter is a good investment. But the S-1 suggests that it is a good business. See here what other strengths the filing reveals.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.