Twitter’s (TWTR) optimistic outlook regarding the long-term strategy seems to be only a flash in the pan outweighed by Standard and Poor Junk level rating for its debt. The company’s brief moment of glory, which came with its first analyst day on Nov 12, (Read More: Twitter Up on Upgraded Long Term Outlook at Analyst Day) was marred by a BB- rating for its convertible notes, which represents below investment-level grade, leading to significant concern among investors.
The stock fell almost 5% ($2.50) from the Wednesday’s closing price to $40.04 on Thursday and went further down to $39.77 during Friday’s trade.
Going by market reports, however, the latest development on the micro blogging company does not come as a surprise. Despite a significant surge in revenues, Twitter is not profitable. The company has accumulated a deficit of $1.27 billion and expects revenue growth to slow down in the near future due to the anticipated sluggishness in the user growth rate. We believe that continuing investments in product development, costs related to international expansion and higher sales & marketing expenses would continue to cloud Twitter’s profitability in 2014 and beyond.
However, some of the analysts do not consider the Junk rating as a long-term threat to the company’s growth given Twitter’s stable outlook supported by a low-cost business model, which remains significantly under-monetized and leaving room for growth. Being an emerging company, raising debt from the market remains imperative and the recent issuance of convertible notes worth $1.8 billion, which is now labeled as Junk, offers substantial liquidity needed to ensure the company’s long-term growth.
While the stakes remain high, we believe the company can revive its market value by directing its investments toward growth drivers such as the expansion into international markets and continued focus on offering new products for advertisers. Further, Twitter is gearing up to enter the fast-growing e-Commerce market. As competition intensifies in the advertising market, e-Commerce will open up as a new revenue source for the company over the long term.
Despite significant competition from Facebook (FB), Google (GOOGL) and Yahoo! (YHOO), we believe its open platform with real-time content, conversational format and distribution ability continues to be its USP. We are hopeful that given its growth plans and current investments, the company will deliver bottom-line growth over the long term.
Twitter currently has a Zacks Rank #2 (Buy).
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