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Twitter IPO – Is TWTR Too Small to Succeed?

twitter ipoTwitter (TWTR) and its pending IPO are all the rage on Wall Street. But is the Twitter IPO doomed for failure because the social media stock is ultimately not big enough to succeed?

That’s an issue raised in a recent Wall Street Journal article, that cites concern from advertisers that Twitter’s user base isn’t large enough to support big-time national ad campaigns and the kind of scale mega-brands look to achieve.

And if those mega-brands really want to advertise in the social media channel? Well, they always have Facebook (FB) instead of Twitter.

Here’s an excerpt from the piece, written by Yoree Koh and Suzanne Vranica:

“Some 22% of U.S. Internet users are on Twitter, according to Forrester Research Inc. By comparison, 72% check Facebook at least once a month.

It is a troublesome issue for Twitter, which relies heavily on advertisers to make money, as it looks to raise $1 billion in a public offering. Advertising accounted for about 85% of Twitter’s $317 million in revenue in 2012, according to the filing. Facebook reported $4.3 billion in advertising revenue last year.

What is more, the rate of user growth is slowing. In the second quarter, Twitter’s growth in monthly active users slowed to 7% from three months earlier, compared with 10% to 11% growth in the prior three quarters.”

From a user perspective, TWTR has about 218 million monthly users, according to the Twitter IPO paperwork — that’s one-fifth Facebook’s 1.15 billion users.

Also, the Twitter IPO will see a value of between $10 billion and $20 billion, making it at best about one-fifth the market capitalization of Facebook at its initial public offering of stock.

Can TWTR succeed even at such a small size? Perhaps. And bigger-picture, isn’t the Twitter IPO all about raising capital to finance big growth that leads to success both for TWTR as a company and for Twitter stock holders?

Given the decline of legacy web “portals” like AOL (AOL) and Yahoo (YHOO) as Internet homepages — and even the more recent move away from Google (GOOG) and its social media — it’s hard to argue that Twitter is more at risk than these other ad-driven companies. Social media as a filter for information is increasingly defining the Internet and how users spend their time — and subsequently, see ads.

But investors in the Twitter IPO need to keep in mind the challenge of scale in the advertising business, where big clients demand big audiences … and given the nature of Twitter right now, it will have a harder time landing some of the biggest contracts without significantly growing its user base.

Related Reading on the Twitter IPO

Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. As of this writing, he did not hold a position in any of the aforementioned securities. Write him at editor@investorplace.com or follow him on Twitter via @JeffReevesIP

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