Twitter: Is a zero-profit company really worth $31 billion

Twitter went public with a bang, as shares soared 74 percent above the initial IPO price. But some analysts are skeptical that the company is really worth $31 billion.

Mark Lennihan/AP
A man walks his dogs past the New York Stock Exchange prior to the Twitter IPO, Thursday, Nov. 7, 2013 in New York. Twitter shares reached $44.90 on its first day of trading.

Twitter proved skeptics wrong as shares for the company closed up 74 percent on its first day of trading. Shares for the microblogging site closed at $44.90 Thursday, pushing the value of the company to more than $31 billion.

So how can a company that has never turned a profit be worth so much?

Twitter has potential.

Though the company posted high losses earlier this year, many investors are confident in Twitter’s future profitability. Twitter’s confident, too.

"There is nothing structural about our business that prevents us from achieving the kinds of margins that are in our peer group," CEO Dick Costolo told CNBC Thursday.

Here’s why Twitter is so confident: 

1. Annual revenue is increasing, according to its IPO filing with the Securities and Exchange Commission (SEC). Twitter's revenue tripled from 2011 to 2012. The company is on track to bring in record revenue this year, having posted $254 million revenue in the first six months of 2013 compared with $122 million in 2012.

2. The number of users is increasing, too. The base of monthly active users has risen by 67 million worldwide in the last year, according to the SEC filing. Twitter’s international presence is growing as well – 166 million of Twitter’s 215 million users are international. The company has big plans to add even more users. According to Mr. Costolo, Twitter plans to make the site more self-explanatory by simplifying terms and navigation. The company has already purchased two social analytics companies this year to help it cash in on the TV industry and help further define itself as "the second screen."

3. Advertising is improving.  Already, some 85 percent of the site's revenue comes from advertising, according to the filing. Twitter changed the way posts are presented on the home feed just last week to make the site more visual. Previously, media was presented as a link, so users had to click on the video or photo if they wanted to view it. Now, the media shows up directly in the feed. The changes are likely to attract more advertisers due to increased engagement.

4. Twitter knows mobile. Sixty percent of Twitter's regular users log in from a phone. It knows how to make money off these mobile users, too – 70 percent of Twitter's ad revenue comes from mobile compared with 49 percent of Facebook's. This is because Twitter users tend to be more engaged on their mobile devices – mobile users are 44 percent more likely to click on links, 66 percent are more likely to retweet, and 76 percent more likely to "favorite" a Tweet, according to the Twitter company blog. 

Nevertheless, the stock is riding investor optimism rather than actual performance. Despite rising revenues, Twitter's third-quarter net losses tripled from the same period a year ago.

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