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By Jeremy Glaser and Rick Summer, CFA, CPA | 10-04-2013 01:00 PM

Twitter a Hugely Interesting Company

Twitter has built a highly unique and proprietary content-distribution platform, but the initial public valuation is likely to be quite rich, says Morningstar's Rick Summer.

Jeremy Glaser: For Morningstar, I'm Jeremy Glaser.

Twitter's S1 was made public this week, and I'm here with Rick Summer--he is the senior equity analyst who will be covering Twitter for us--to get his first take.

Rick, thanks for joining us.

Rick Summer: Sure thing.

Glaser: So, let's talk a little bit about how Twitter is doing so far. Any surprises when you cracked open that filing as to what kind of progress they are making?

Summer: I think there is a few things that are interesting. Obviously, a few years ago, the rumors were, Twitter can't figure out how to make money, and I think that clearly they have. At a run rate of at least north of half a billion dollars in revenue this year, they are already larger on an advertising basis than LinkedIn from their advertising segment. So pretty meaningful. Certainly not reaching the levels of a Facebook yet, so I think that's an important thing to consider.

Secondly, they are still investing a ton of money. They have somewhat turned the corner--positive operating cash flow in the first six months of this year--but still not positive free cash flow once you back out capital expenditures as well.

Glaser: Where are on that revenue ramp? Does Twitter have a significant opportunity to keep growing that revenue?

Summer: I think that one of the big success factors about Twitter is the fact that they've evolved from this 140-character interaction to really start to incorporate new sorts of ad formats as well. But first, promoted tweets, promoted trends, ways to start to differentiate exactly how you show content, but more importantly ways to charge advertisers at the same time without changing how you and I look at our Twitter feed--I think, that's really important. We are at 218 million users right now. We've seen just year-over-year 48% growth in their ability to generate ad revenues on each of those monthly active users at the same time. That's pretty tremendous. Good progress.

Glaser: Do you think that there is significant room to add a lot more users, or are we closer to an upper limit?

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