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Why some experts think Twitter stock is a bargain

Wednesday - 11/6/2013, 11:18am  ET

BERNARD CONDON
AP Business Writer

NEW YORK (AP) -- Critics dismiss it as a fad. It's tiny next to some rivals. And it loses money.

Yet for all its faults, Twitter has plenty of fans on Wall Street. They say investors should seize the initial public offering this week and grab an early stake in a company that is revolutionizing the way people share experiences and opinions. It's bound to make big money someday.

The most optimistic think Twitter is worth $50 per share, maybe even more. If they're right, early investors could make a quick profit. The highest price at which Twitter plans to sell its stock is $25 a share, half as much.

Below are a few reasons some experts are enthusiastic:

Q: Why buy stock in a company that is losing money?

A company need not show a profit to go public. And some companies that lose money end up being big winners. At its public debut 16 years ago, Amazon.com was losing money. Its stock is up more than 18,000 percent since then.

What's more, financial analysts who've studied Twitter say the big losses in this case make sense, and are even welcome. Twitter needs to spend money to build its business and establish itself as a major platform for advertising on smartphones and other mobile devices.

In 2012, companies spent a total of just $10 billion on mobile ads. That's a small slice of the global advertising dollars, but that part of the ad business is growing quickly.

For Twitter, the logic is simple: Get big fast, and profits will follow.

"They're hoping top-line growth will lead to bottom-line growth," says Arvind Bhatia, a financial analyst at Sterne Agee. "You have to buy in on the vision."

Bhatia thinks Twitter could be worth as much as $33 per share in a year and possibly $48 per share in two years.

Q: Twitter has just 232 million regular users, a fraction of Facebook's 1.2 million users. Is that too few to succeed?

Many bulls think the Twitter, an instant-messaging service, is too appealing not to be embraced by millions more people. Tweeting is in real-time and instant. And the tweets can be read by anyone, allowing everyone from celebrities and presidents to big corporations to spread their messages fast.

Rick Summer, an analyst at Morningstar, admits that Twitter is "confusing" to newcomers. But he expects the company will invest in simplifying the site and making it more appealing. If it does so, he thinks the number of users could grow to more than 1.8 billion in 10 years -- a nearly eight-fold jump -- and turn the company into a "mass-market" social network attractive to advertisers.

Under his most optimistic scenario, Summer thinks Twitter could be worth $50 per share.

Q: When will Twitter generate profits?

Possibly not until 2016 or later, but analysts aren't sure. What's more, they don't seem to be too worried about profits.

Instead, some analysts are focusing on figure called the "adjusted EBITDA." That's a measure of cash flow that excludes interest payments, taxes, depreciation charges and the cost of some stock-based compensation to workers, among other things. Many accountants hate this measure, and Twitter has drawn criticism for even including it in its offering documents.

For what it's worth, though, many analysts say adjusted EBITDA will soar as the company ramps up its mobile advertising business. Victor Anthony of Topeka Capital estimates it will hit $401 million by the end of 2015, a jump of 600 percent in two years.

"We believe that Twitter's user and advertising monetization platform is in the early innings," Anthony writes in an Oct. 30 report.

He thinks Twitter will be worth $54 per share at the end of next year.

Q: If I can't get comfortable with Twitter's losses, is there any reason to invest?

Brian Wieser, an analyst at Pivotal Research Group, says investors considering Twitter should understand it's a bit of gamble. But he says they need to think more like venture capitalists and focus on the strength of the company's management.

He's impressed with the progress the Twitter team has made in building its advertising business from virtually scratch in April 2010. He says the company is "clever" and "wise," and cites its moves to partner with TV content providers, like the NFL and CBS, to attract advertisers to its site.

"They decided not to attack television, but embrace it," Wieser says. "They've become part of the (TV) ecosystem."

He thinks Twitter is worth maybe $29 per share, 16 percent above the highest expected offering price.

Q: What if the sunny projections about Twitter aren't met?

A: All is not lost.

Twitter might still make an attractive acquisition target by bigger companies trying to build their mobile advertising business. Think Facebook. Think Google. Morningstar's Summer says Twitter has data on customers that would complement those held by the two companies. The bigger rivals would be able to use their existing sales and marketing staff to drum up ads for the instant-messaging service.

He calls Twitter-Facebook or Twitter-Google a "logical fit."


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