Ahead of Twitter Offering, Wall Street Warms to Social Stocks

Facebook’s successful push into mobile advertising is good news for Twitter, at least in the short term

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Social media stocks are enjoying a wave of bullishness on Wall Street in advance of Twitter‘s highly anticipated public offering.

The hangover from Facebook‘s messy IPO last year appears to have finally passed. That firm’s debut in May 2012 led to a $10 million fine for Nasdaq after technical glitches marred trading. Worse, the stock tumbled for months from its initial $38 price, bottoming out at under $18 last September. Taken together, the dismal performance of Facebook, Groupon, and Zynga cast a pall over once-buzzy, social technology companies.

How things have changed: Facebook shares are up almost 90% so far this year, reaching $50 for the first time Thursday. Groupon shares, meanwhile, have more than doubled this year to about $12 in the wake of founder Andrew Mason’s departure.  And deeply troubled game-maker Zynga’s stock is within 10% of its 52-week high. (LinkedIn, which has consistently outperformed its peers, is now trading above $250.)

In other words, Twitter appears to be preparing a debut just as investors’ skepticism about social media as a business is waning. “The uncertainty has been diminished somewhat,” says Josh Olson, an analyst for Edward Jones. “I’m not saying there’s not uncertainty around the model, but it is less so than at the time of the IPO. Facebook has proven that its model works.”

(MORE: Want to Know About Twitter’s IPO? Look At Its Acquisitions)

Last year, investors and analysts were skeptical that Facebook would be able to effectively translate its lucrative desktop advertising business onto mobile devices. At one time, the company admitted it wasn’t “generating any meaningful revenue” from its mobile products. By loading users’ News Feeds with targeted ads (about one per 20 posts, according to Bloomberg) and even suggesting application installs, the company has scaled its mobile business quickly. Facebook reported in July that it generated more than $650 million in mobile ad revenue in its most recent quarter, more than 40% of its total advertising take.

While Facebook had to widely retool its business for phones and tablets, Twitter has been mobile-first since its earliest days. (Users once commonly sent tweets via text message.) “When Facebook IPO’d, there were significant questions about its mobile business,” says Clark Fredericksen, vice president of communications for researcher eMarketer. “If you look today at Twitter, [it] has more or less answered those questions about its own products.”

Twitter already likely gets the majority of its ad revenue from mobile, according to eMarketer’s estimates. The research firm also predicts that Twitter will grow its digital ad revenue faster than Facebook, Google, or LinkedIn this year. But Twitter’s overall revenue picture is still unclear. The company’s decision to file confidential paperwork to the Securities and Exchange Commission under provisions of the Jumpstart Our Business Startups Act means that it is not required to divulge its financials publicly until 21 days before an investor road show. A date for the offering has not yet been set.

Facebook and Twitter, already competitors, will no doubt become greater rivals once Twitter goes public. Facebook added support for hashtags this summer. And Twitter recently introduced threaded conversations that make following a deluge of tweets similar to reading the comments on a Facebook post.

The next battleground is likely video. Facebook is expected to roll out video ads soon with an asking price of as much as $2 million per day, a  figure that would put the company in direct competition with television networks for advertisers’ dollars. Even this initiative will have a mobile bent–right now the company is slowly introducing automatically playing videos into users’ mobile News Feeds to prepare them for ads.

(MORE: Twitter’s Big Push to Monetize Social TV)

Twitter, which lacks Facebook’s size, is trying to work with traditional media companies. (Twitter claims 200 million monthly users; Facebook says it has 1.15 billion monthly users.) This week Twitter inked deals with CBS and the NFL to join its Amplify program, through which companies can tweet short video clips (often from television) with preroll ads. It’s the latest step in Twitter’s ongoing campaign to position itself as complement to a TV ad buy.  “It’s a very interesting concept for a new media company to work with an old media company and together try to grow an ad budget,”  analyst Fredricksen says.

Plenty could still go wrong. Congress’ looming fight over the debt ceiling could easily roil markets, scrambling gains Internet stocks have made. (The Treasury Department now estimates its bevy of extraordinary measures will run out by Oct. 17.) And yet, Facebook will have undoubtedly helped boost the buzz ahead of its rival’s offering. “You’ve got a lot of positive sentiment around social,” Olson says. “Investors will be more willing to commit capital to a name like Twitter, if we’re comparing to 15 months ago.”

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