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Challenges abound as Twitter shines in IPO

Share prices for the micro-blogging site Twitter surged during its IPO on Thursday. But the online service's massive losses and slumping user numbers raise questions about the business' profitability.

Twitter share prices jumped by 77 percent to $46.10 from its $26 IPO price in early trading on Thursday. Shares opened at $45.10 and rallying from there.

The tweeted announcement made in September that the online company was going to float its stocks has rekindled a stock market fever that some analysts have said is unjustified in the case of Twitter.

smartphone showing a Twitter profile Photo: Marius Becker/dpa

Some analysts doubt Twitter's business model requiring more users to create sustainable revenues

According to latest company figures, Twitter has about 230 million users, but not all of them use its 140-character messaging service on a daily basis. By comparison, social networking leader Facebook boasts more than a billion users, most of whom access the site every day.

Moreover, as it goes public Twitter is saddled with losses totaling $500 million, while Facebook was already writing profits at the time of its IPO some 18 months ago. The firm attributed them to major investments which would be turned into profits as its services would start to grow.

Some analysts, however, see Twitter's dire figures as a recipe for a falling share price after the flotation.

Doubtful markets

"Generally speaking, this IPO is a positive thing," Frank Horn, an analyst with German digital strategy firm Kpunktnull told DW. "It means that another technology startup is becoming a real company."

Holger Schmidt Photo: Private collection

Internet blogger Holger Schmidt shuns Twitter shares, calls the IPO a hype

But Internet blogger and business reporter Holger Schmidt chose to disagree. Noting that he wouldn't touch Twitter shares, he told DW that the shares of Internet startups go on a rollercoaster ride following their IPO.

"Twitter has a growth problem," he said. "Many of the core users - the people interested in information - have been using it for a long time."

Schmidt added that with the market was nearing saturation, new customers may use Twitter services only occasionally, tweeting just for specific events or TV shows they enjoy.

In addition, Twitter was facing strong competition from other Internet-based messaging and chat networks. Whatsapp short message service, for example, had already 350 million users in the Western world, he noted, while Lion was exceptionally strong in Asia with 280 million users.

Nevertheless, Schmidt admitted that Twitter had one important thing going in its favor: the IPO's timing. "Facebook, Google, Amazon, Linked-In are all trading at record highs, meaning that Twitter has set the timing for its IPO very well," he added.

Dot.com bubble revisited

Shares in Linked-In, the world's biggest career network, for example, are trading five times higher than during its initial public offering about two years ago.

Similarly successful was the flotation of Yelp - an Internet platform recommending restaurants, shops and other retail businesses. Its share price has risen from $15 to a staggering $70 in just over a year. And Internet-based radio broadcaster Pandora has been able to boost its value from $16 a share to $26.

However, there were also spectacular failures, said Dirk Müller, author of a book titled "Cash Course."

"In cases of what I call emotion-driven IPOs, mainly involving Internet stocks, a lot of clueless investors get carried away," he told DW, adding that this would not bode well for a stable development of share prices.

A recent negative example, he mentioned, was US-based deal-of-the-day website Groupon, which had seen its initial share price of $20 slump by 50 percent since 2011. Online gaming site Zynga has also seen it stock price drop to a third of its IPO offering.

Reason for hope in Facebook IPO

Last year, US-based social network Facebook completed the largest-ever stock flotation of an Internet firm. The company issued new shares worth about $16 billion after hiking its initial price several times from a minimum of $28 to a maximum of $38.

Facebook stock price curve Photo: Sven Hoppe/dpa

It took almost a year until Facebook shares have stabilized on rebounding investor confidence

However, the share slumped dramatically during its first day of trading amid investor concern Facebook might not live up to the high hopes its IPO had created.

Now, more than a year later, the share has rebounded, trading at a high of $45 and boosting Facebook's value to $109 billion. Nevertheless, the IPO was still considered a failure in media coverage, said Kpunktnull strategist Frank Horn.

"It certainly was a catastrophe for the Nasdaq stock exchange, which botched the IPO due to technical difficulties," he said. "And it was a failure for those investors who sold their shares during the first day of trading. But for Facebook, looking at it today, it was a success."

In an effort to avoid at least the hazard of technical failures, Twitter has chosen the New York Stock Exchange over the traditionally tech-heavy Nasdaq as the venue for its share flotation. The stage seems well set for the micro-blogging site to jump among the top ten of the biggest Internet companies in the world.

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