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  • 5 Reasons Not To Invest In Twitter 0 comments
    Nov 28, 2013 10:00 AM | about stocks: TWTR

    1. Hyped-up IPO's are Dangerous

    As shown by the disastrous Facebook IPO, worldwide gushing does not always lead to good results. Twitter is - and has been - the talk of the town for months, even before its public offering. Analysts, experts and self-designated were talking and tweeting about Twitter as if it was the second coming. However, if you are a levelheaded investor, you should wait at least 6 months to a year before jumping the Twitter-enthusiasts' bandwagon.(click to enlarge)

    2. Twitter Ads - The Devil You Don't Know?

    The main difference between Facebook and Twitter is the fact that Facebook advertising works. Users click on ads displayed on Facebook and the social media networking site has become the second most popular advertising space online. With Twitter, the jury is out. Projections argue that Twitter will be huge, but the intensity of Tweeting and the fast-paced interface might not be conducive to ads. No one knows how it will play out, but waiting and seeing might not be a bad idea. Twitter's social function is different to Facebook's. Twitter users are more exclusive whereas everyone is on Facebook.

    3. Haphazard and Lofty Evaluation

    Twitter is currently one of the most overvalued shares in the stock market. It's currently at almost $41 a share which means that it costs almost 40 times its revenue over the past 13 months. This is by far the lushest valuation of any U.S. IPO since 1975. There's plenty chatter about companies such as Twitter and Instagram being worth the money, but since either one produces anything tangible, it's difficult to predict how such companies will perform in the long run.

    4. Where's the Money?

    Twitter has not showed a profit since launching, but it's clear that the company's future and potential success or failure will depend almost solely on advertisements as a key source of income. Twitter features three types of ads: promoted tweets, promoted accounts and promoted trends. Companies such as Apple can pay Twitter to advertise a single tweet or conversely can pay the company to ask twitter users to follow it. Such options obviously do not seem to work well considering that more that over half of all Twitter users claim that they don't notice ads on the Twitter feeds. Interestingly and rather promisingly, 31 per cent claim that they've clicked on or followed one of the promoted accounts. There's hope for twitter, after all.

    5. Advertising Killed the Social Media?

    Considering that most social media sites peaked in terms of user interest and hype before they became cash cows for the shareholders, it's likely that Twitter will follow the path of Facebook and LinkedIn. The question is: what happens when advertising starts brining in revenue? Usually this will irk many users and they start flocking away from the particular social media site. Being commercially successful is a double-edged sword. Facebook peaked and now its users are opting for YouTube instead. Indeed, when social media sites become cluttered with ads, users feel that their liberty is threatened.

    Twitter's future as a desirable share depends on its performance as a revenue generator. There's a good chance that Twitter will utilize its user base and make a bundle in ad revenue, but the IPO might lead to unintended consequences.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Stocks: TWTR
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