Twitter shares soar in market debut

Updated at 4:04 p.m. Eastern

(MoneyWatch) Twitter shares surged Thursday on the New York Stock Exchange as investors clamored to get in on the social media company's highly anticipated initial public offering.

On a day that financial markets sank, Twitter's stock price opened trading at $45.10, briefly topped $50 before edging down late in the session to finish at $44.90. That represents a 74 percent gain over the initial $26 a share price that Twitter and its underwriters put on the IPO. At the close, the microblogging platform had a market value of more than $24 billion.

The jump in Twitter's shares reflect the excitement over what is the largest technology IPO since Facebook's May 2012 offering, which raised $16 billion in what is the biggest ever Internet company initial offering. By comparison, Twitter raised $1.8 billion in its IPO, making it the third-biggest Internet IPO of all-time.

The company, which will trade under the symbol "TWTR," raised the price range for its stock earlier this week to $23 to $25, from an initial range of $17 to $20. The message from investors: Get it while it's hot.

Indeed, Twitter's market debutputs a capstone on the company's rapid rise. Launched only in 2006, it now draws 230 million monthly users around the world, making it the second-largest social network after Facebook (FB). Its signature 140-character per tweet platform has become ubiquitous as a place where everyone from media kingpins and Hollywood celebrities to political leaders and revolutionaries communicate.

If Twitter is to thrive, however, it must not only continue to attract the rich and famous with masses of "followers," but also make deeper inroads among average users. That is why, even with Twitter's outsized cultural impact and brand recognition, technology and financial experts are more cautious in judging its long-term commercial prospects.

By any measure, Twitter has grown fast. The company more than doubled its revenue in the third quarter, to $169 million, compared with the year-ago period and is on track to top $620 million for the year. Analysts expect it to generate sales of around $1 billion by the end of 2014.

Still, Twitter has yet to turn a profit. It lost $67 million in 2010, $164 million in 2011 and $79 million in 2012. The company has continued to bleed cash this year. Losses have piled up as the company quickly ramps up its work force and spends aggressively to expand its offerings. Twitter's advertising revenue is increasing, but at 66 cents per user the company remains well behind Facebook's $1.38 in ad revenue per user, noted Morningstar stock analyst Rick Summer.

More worrying, the rate at which Twitter is adding users is slowing, especially among younger people. Its rate of revenue growth, while still fast, has slowed. A key question for the company is whether it can continue to add profit-driving features and services without alienating its core users.

That is easier said than done. Social networking is among the most competitive online arenas, with Twitter facing off against powerhouses such as industry leader Facebook and its Instagram photo-sharing platform, content-sharing site Pinterest, Yahoo's (YHOO) Tumblr, and scores of social media startups. To grow, Twitter will also have to boost its popularity overseas, never an easy proposition.

Users of such services are notoriously fickle, raising the risk that Twitter could one day lose its hipness quotient in the same way that MySpace, once the king of the hill among social networks, did when Facebook came along. That may be of particular concern with Twitter, whose purpose and utility remains a mystery to some Internet users.

"There's a bit of a stickiness problem with Twitter users," said Brian Blau, research director in consumer technology at Gartner. "Some users come to the site and are confused -- they don't really know what it's about. Others may be hesitant to talk in an open and public environment."

Twitter is also coming of age at a time of intense competition not only from rival social networks, but also from the millions of mobile applications that now vie for people's attention. The average smartphone owner tries five new apps per month, according to Gartner. Although many people access Twitter using a mobile device, meanwhile -- 70 percent of the company's revenue comes from mobile traffic -- the company remains far behind companies like Facebook, Google (GOOG) and Apple (AAPL) in terms of total unwired users.

In the shorter term, the greater risk for Twitter's new shareholders may be from the stock market, which some observers say looks overvalued. Stock prices have repeatedly marched to record highs in recent weeks, propelled in large measure by expectations that the Federal Reserve will extend monetary stimulus well into 2014. The S&P 500 now trades at roughly 17 times the index's trailing operating earnings, above the post-World War II average of 15.3.

That valuation, while not excessively rich by historical standards, leaves investors at risk if the economy encounters some shock, warns Scott Clemons, chief investment strategist, wealth management, at private bank Brown Brothers Harriman. Other signs that stocks could be running out of breath include waning corporate earnings, high profit margins and evidence of investor complacency, such as the huge first-day surge in the value of shares of The Container Store(TCS) when the storage company went public last week.

"There are elements of euphoria about Twitter's IPO, and not just Twitter," Clemons said. "We saw that with a mundane business like The Container Store. That seems like 1999 a bit -- this idea that it's not whether or not an IPO is the right price or a good investment, but can I or can't I get some shares."

Facebook is much more richly valued than other major tech players. According to financial researcher SageWorks, at around $45 a share Twitter is valued at roughly 77 times its 2012 sales. That compares with a multiple of 22 times for Facebook and 10 times for Apple (AAPL), both of which are profitable.

Like any newly public company suddenly under the microscope, Twitter's greatest challenge will be to execute on the company's strategy while it expands its business and improves its technology. Also like other public companies, Wall Street will demand that Twitter performs well quarter after quarter. That is sure to require moving beyond selling ads and coming up with new ways of making money, Blau said. Twitter is already moving in that direction by, among other things, selling promoted tweets. 

Unlike Facebook and other high-profile startups that were profitable when they went public, however, Twitter's losses may leave the company a slimmer margin for error. If the tastes of Internet users change quickly, investors can lose faith even faster.