Twitter Goes Public at Unsustainable Prices


NYSE floor at Twitter IPO

The last large technology company to go public in recent memory was Facebook (FB), until now. Twitter’s initial public offering (TWTR), despite best efforts to remain inconspicuous for as long as possible in the filing process, managed to stir up the hype machine just enough to cause greed-based pandemonium on the floor of the New York Stock Exchange all morning.

You may recall that Facebook was a flop at IPO, if there ever was one, and that it could literally be a case study in the Harvard Business Review for how *not* to go public.  Even though it has recovered gracefully, it was a harsh reminder that tech stocks are not the most solid investments.

So Twitter set out to not encounter the same mistakes as Facebook during its own IPO.

  1. They hired Goldman Sachs to be the lead underwriter, instead of Morgan Stanley, typically the first choice for Silicon Valley companies. Goldman worked to keep much of the offering out of the hands of retail investors and hedge funds that like to short stocks, opting instead for big long-only funds. No buying was needed to keep Twitter at the asking price, like at Facebook’s launch.
  2. Twitter will keep all the money raised in its IPO and use it for general corporate purposes, capital expenditures, or save it for a rainy day. On the other hand, more than half the money raised in Facebook’s IPO went into the pockets of early shareholders of the company, like venture capitalists and hedge funds.
  3. No Stock Market Glitch. Shares of Twitter started trading on Thursday morning without any problems.  In Facebook’s case, an issue with Nasdaq’s computer programming delayed trading for some 30 minutes and caused confusion among traders. As a result, Nasdaq ended up paying  a $10 million fine to the Securities & Exchange Commission and tens of millions more to brokers who lost money.

Twitter was always aggressively valued; the night before the IPO the starting price was set at $26, which would have indicated the company valued itself at 11 billion.  Since Twitter didn’t increase the overall allocation of stock to be sold, demand for the stock easily overshadowed supply.  Twitter opened at $45.10, peaked at $50.09, and closed at $44.90 (up 72.69%), which would represent a valuation closer to 25 billion.

twitter-follow-achiever

25 Billion?!?

25 Billion. Twitter has its fair share of risk.  Over 30 pages of it, actually, if you go by the SEC filings. Here are a couple of things to be concerned with if you are considering purchasing Twitter at these larger than life prices:

  1. Twitter has to date no profits. At least Facebook was earning money, $1 billion in the calendar year prior to the IPO. But Twitter has lost $133.9 million in the first nine months of 2013. Still, Twitter is going public at an earlier stage in its growth curve, which might make it easier for Twitter to meet high investor expectations as long as Twitter doesn’t cause them to lose faith in its story.
  2. Twitter is much smaller than competitors. With some 230 million active users, Twitter has about one-fifth of the user base of Facebook today. When it went public, Facebook had 900 million users.  A key metric in measuring ad revenue success for these tech giants is earnings per Monthly Active User (or earnings/MAU).  Unfortunately Twitter opted not to disclose this information, so the data out there is based on inferences and can be conflicting. This article does a great job of breaking down where ad revenue comes from and how it is broken down. No clear winner yet, but Facebook was certainly farther along at the time of IPO.
  3. Twitter is not growing in the U.S. nearly is much as it is in users overseas, but overseas users are not buying as much advertising.  Although there are a finite number of people on the planet, we do measure social media companies on the growth of their user base, and this disproportionate user growth needs to be corrected. That says nothing for the large pool of “dark users” or inactive accounts that distorts the numbers in this space.  Twitter has far more dark accounts than competitors.  At the time it crossed the 500 million accounts mark in 2012, Twitter had an estimated 138 million active users, which is reiterated in the SEC filing. Which means that only 28% of its user base was active at that time. The rest — 362 million accounts — had walked away.  Twitter needs to hold engagement if advertising revenue is to increase.

Why I Find Twitter Compelling

twitter-birdTwitter may never be the biggest.  It may never be the social media breadwinner according to the current brand of statistics used to measure success in the industry.  But you can’t measure growth forever; eventually you have to plateau.

I believe that Twitter is more valuable than an advertising engine alone.  Twitter is the only existing social media platform that has on several occasions been better than traditional news outlets at getting current information about world events out to the public. One need not look further than the crisis in Egypt to find examples of how all major news outlets in the world were essentially getting the news from tweets from the people.

If twitter can somehow harness that crowd-sourcing power into more than just an ad revenue engine, then Twitter will have actual value, not as a revenue stream but as part of an ecosystem for an informed distributed public.

Twitter’s Future on the NYSE

I believe the price will come down to original estimated levels.  I will not be buying twitter until it is at least under $30.  I sincerely hope that those that got caught up in the madness don’t lose their fortunes to mob mentality.

~PL

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