Twitter's IPO is only a matter of time. At least that's the conventional wisdom in Silicon Valley these days, echoed in two recent stories in the media.

But I'm baffled by the air of inevitability that surrounds the company's march toward the public markets.

At the moment, a Twitter IPO seems more fantasy than reality. From Twitter's own unproved advertising business to the lackluster debut of Facebook and other social media superstars, I'd argue the odds against Twitter going public have only gotten steeper this past year.

"Twitter has a very long shadow to remove itself from before it can make a really decent IPO play," said Lee Simmons, editor of Hoover's, which tracks IPOs.

Last weekend, a New York Times profile of Twitter CEO Dick Costolo called an IPO the "most likely exit strategy." A Bloomberg profile Monday of Twitter Chief Financial Officer Ali Rowghani cast his main role as preparing for its "eventual initial public offering."

Understandably, no executive likes to stand up and say they're tidying things up to sell to the highest bidder. But, for my money, that's a much more likely outcome.

Here's why Twitter faces such a steep climb if it really wants to launch an IPO.

Its first hurdle will be the dim view that investors have of Web businesses based on advertising. Facebook, so far, is not the juggernaut once expected, casting doubts on the ability of many social networks to convince advertisers to spend large sums to reach their large base of users.


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Next, Twitter faces plenty of competition for digital ad dollars. Google's search-driven business is proving to be durable, while Facebook, despite its stumbles, is still far larger than Twitter.

Still, it has gotten serious about the advertising business, including making changes that have angered some longtime users and developers.

But for all the attention these products have gotten, they are still in the embryonic stage.

Major brands and advertising agencies have experimented with campaigns on Twitter, said Jeremiah Owyang of Altimeter Group. But, he said, "I haven't heard any brand or agency say conclusively, 'This is where we need to be.' "

Let's give Twitter the benefit of the doubt. In recent leaks to the media, the company has indicated its ad products are performing better than expected, and that Twitter is on track to post $350 million in revenue this year, and possibly $1 billion in revenue in 2014, the year it supposedly aims to go public. Reports from eMarketer are a bit less bullish, forecasting revenue of $288 million this year and $807 million by 2014.

That rate of growth would be impressive. But even the extremely bullish projection of $1 billion in revenue by 2014 is well short of the $5 billion Facebook expects this year. And while we don't know much about Twitter's expenses, we do know Facebook's expenses, when it had roughly the same number of employees as Twitter does now: about $780 million.

It's not an apples-to-apples comparison, but it still seems like it will be a stretch for Twitter to be profitable by 2014.

Lise Buyer, founder of the Class V Group, an IPO advisory firm based in Palo Alto, says there are two factors investors will want to see.

"What will matter is that they have a rapidly growing model, and one that investors think is sustainable," Buyer said.

Now, if Twitter hits those revenue marks, it could make the case for fast growth. That's a big if, given the untested nature of its ad services. But sustainable? If the company is still not profitable at that point, it'll have to make a darn good case of how it'll get there.

"After what we saw this year, investors would be a little less willing to dive whole hog into a stock like this," Simmons said.

Is there a bullish case for Twitter's IPO chances? Sure. Let's start with the fact that two years is a long, long time in Silicon Valley and the stock markets. Maybe the economy will be booming. Maybe Facebook's shares will hit $100. Maybe a string of successful but smaller tech IPOs will make investors giddy.

Costolo and Twitter's current board are also seen as big pluses. The company, by some accounts, is poised to do well with mobile advertising. And as Buyer notes, some IPOs are driven by emotion, and you can expect there would be plenty of that for any Twitter public offering.

"I don't think the door is closed," Buyer said. "It's just a matter of doing everything they can to keep hope and dreams aligned with reality."

But I still say way too many things have to line up exactly right for a Twitter IPO in 2014. And inevitably, investors, who have poured $1.16 billion into the company, and employees will want some sort of exit.

Given all these challenges, it's more likely that Twitter will be acquired by one of the few companies that would have deep enough pockets: Apple, Google or Microsoft.

There's no question that getting acquired in Silicon Valley comes with the stench of defeat. But it shouldn't.

And in the case of Twitter, that sale will guarantee the service a long life. Even if someone else's name is on Twitter's door.

Contact Chris O'Brien at 415-298-0207 or cobrien@mercurynews.com. Follow him at Twitter.com/obrien and read his blog posts at www.siliconbeat.com.

  • Business model still unproved;
  • Facebook's faceplant makes Wall Street skeptical;
  • Path to profitability uncertain;
  • Hard to sustain current growth rate.


    TWITTER BY THE NUMBERS

    Twitter does not officially release its finances, but there have been leaks:
    2012 revenue: $350 million
    2014 revenue: $1 billion

    But that compares with Facebook's current rate of $5 billion in revenue. And while it does not release expenses, Facebook's expenses were roughly $780 million when it had the same number of employees that Twitter has now, meaning it is likely unprofitable and would have to grow rapidly to become profitable.