Investors willing to bet on Twitter will have to overlook mounting losses and slowing user growth — and have faith that the 8-year-old Internet messaging company can transform a household name into advertising dollars.
Fund managers who were optimistic about Twitter's financial prospects shrugged off its latest $65 million quarterly loss as standard for startups chasing growth, pointing instead to revenue growth that more than doubled.
But others warned of the risks of investing in a company with a management that has yet to prove it can generate a profit.
"It's worth having exposure to a name like Twitter, although you have to take a conceptual leap of faith with regard to valuation, and say it's a unique franchise that isn't likely to go away," said Karl Mills, president and chief investment officer for private investment adviser firm Jurika, Mills & Keifer in San Francisco.
"Like Twitter, Amazon was in investment mode for a long time. They still are, so that doesn't worry me."
Twitter's latest IPO filings showed its net loss in the September quarter tripled to almost as much as it lost in all of 2012.
As Twitter races toward the year's most highly anticipated tech offering, memories of Facebook's disappointing 2012 debut threaten the online messaging service's own splashy coming-out party.
Like Facebook, Twitter enjoys strong brand recognition, which typically translates to outsized retail investor interest. That was one of the reasons Facebook was able to raise its IPO price to $38 a share, from an initial range of $24 to $35 a share. That gave the company a valuation of about $100 billion, or about 99 times its 2011 earnings.
Facebook shares promptly plummeted on their first day of trade. They didn't regain their IPO valuation until more than a year later, in August 2013.
Twitter, which is expected to go public in November, has yet to determine pricing, but investors say it might come under pressure from financial backers to go high. Analysts expect the company to seek a valuation of at least $10 billion.
Unlike Twitter, however, Facebook and professional social network LinkedIn both were profitable when they debuted. Twitter's still cloudy outlook makes some investors nervous.
"I want something to be generating income. If they can't make the transition from capturing market share to generating income, they're going to run out of money eventually," said Brian Frank, portfolio manager for Frank Capital Partners in New York. "But at the same time, if they stop investing in growth, they're going to lose users and risk people not staying engaged with the brand."
"The Twitter IPO could mean the top of the social media peak," he added.
Financial advisers are managing clients' expectations.
"I am telling clients to give it some time at the IPO and see how it does first," said Alan Haft, a financial adviser with California-based Kelly Haft Financial. "If they are gamblers and want to make a few bucks out of the gate, fine, but if they are investors they should hold off."
The potential demand from retail investors remains unclear. But several investment advisers interviewed by Reuters said they had already received calls from interested clients — though not on the level seen when Facebook became one of the first of the social media giants to go public.
Nancy Caton, managing director of Carson Wealth Management Group's San Francisco Bay office, was surprised about how little interest clients have shown in investing in Twitter, given the frenzy she saw around Facebook.
"With Facebook, it was crazy … we were flooded with calls," she said. "Maybe they learned a lesson."
But Twitter does not have the same presence among Caton's clients, who are mostly in their 60s, she said. "A lot of grandparents are on Facebook, that's how they get pictures of their grandkids," she said. "But I might have one client that uses Twitter."
Still, Twitter has no shortage of believers, including SunTrust Robinson Humphrey analyst Robert Peck, the first to slap a "buy rating" on the stock and who on Wednesday echoed his previous optimism about the company.
Twitter's fledgling advertising model is centered around the "promoted tweet" and massive marketing campaigns built around television-viewing. The promoted-tweet tactic has since been replicated by rivals like Facebook.
Its more nascent second-screen approach has also won favor among media and entertainment executives because they encourage audience interaction on mobile devices and open a new channel for advertising as well.
"Twitter has a mobile strategy, and it seems like they're ahead of Facebook in mobile," said Dan Veru, chief investment officer at Palisade Capital Management LLC in New Jersey, with $4.5 billion of assets under management.
In fact, says one Silicon Valley investor, growing losses may just be good business.
"Increasing losses is not a problem if the unit economics are sound. With profitable unit economics, it is financially irresponsible NOT to run losses, assuming you have access to capital," said David Cowan at Bessemer Venture Partners, whose investments include LinkedIn. "Having said that, I have not examined Twitter's financials to assess the unit economics."
Reuters' Sarah McBride contributed to this report.