Clearly the hype and demand surrounding Twitter’s IPO this week is building. The company upped its price range to $23-$25 a share from $17-$20 Monday, and there are reports out that it priced the IPO above the increased range.
That's still unlikely to price many investors out.
The folks handling Twitter’s IPO have learned a thing or two from Facebook's(FB) notorious debut last year.
Twitter is looking to raise much less than Facebook did, offering fewer shares, and pricing them lower. Forget for a moment that Facebook was a bigger company, and profitable, at the time of its IPO. Facebook raised the number of shares it was selling, the number of shares insiders would sell and the pricing in the days before it began trading.
Facebook raised $16 billion. But the stock priced plunged and struggled for much of the next 12 months.
Twitter’s is selling 70 million shares, priced between $23-$25. If all goes as planned, they’ll raise around $2 billion, the smaller offering will be met with overwhelming demand, and shares will jump. Given the results of some other IPOs this year - Container Store Group, for example, doubled on its first day of trading on Friday – Twitter shares could rise rapidly.
“The obvious question is should you still participate?” analyst Richard Greenfield of BTIG wrote on Monday. At the higher price range, shares will equal nine times the firm’s 2015 revenue estimate and 5.9 times its 2016 revenue estimate. Another ratio, EV/EBITDA (enterprise value to earnings before interest, taxes, depreciation and amortization) now sits at 52 times 2015 revenue estimate and 24 times 2016.
“We would participate within the $23-$25 range,” Mr. Greenfield writes. But the firm’s view was that Twitter could go to $30 “over the next year.” That level might come much sooner than people think.
One aspect of the company that Mr. Greenfield likes is that Twitter’s monetization efforts are still at an early stage. “Advertising on Twitter only began in the middle of 2010,” he wrote, “not to mention, mobile advertising did not even really exist before 2010.” The company has a light “ad load” (roughly 1% of the tweets on mobile devices are ads), which gives it room to increase ads. “We expect a lot of growth ahead in advertising.”
Still, Twitter is operating from a smaller base than Facebook, and is likely to continue operating from a smaller base. “We believe investors should assume that Twitter’s penetration and user base will be materially smaller than Facebook’s,” Sanford Bernstein wrote. The firm sees Twitter with about 100 million active users monthly in the U.S., and 575 million overseas, by 2018. Facebook has more than 1 billion monthly active users.
The bottom line that investors can’t completely dispense with, though, is this: Twitter is not profitable, and might not turn a profit for several years. While it’s unlikely that another competitor could completely supplant Twitter, the way Facebook did to MySpace, for example, a new competitor could come along and siphon off some of the audience and eyeballs.
Heard of Knotch, for example? No? Well, that won’t be the last one you hear about. Twitter may be “sticky,” as the cool kids say, but that doesn’t mean it won’t face rivals, and that will add another pressure to its bottom line.
The hashtag #twitterprofits is going to be a lonely space for the time being.
At $30 and above, Barron’s Andrew Bary wrote, Twitter’s valuation becomes harder to justify. “Barron’s tends to be cautious on richly valued stocks,” he wrote, “but Twitter would look appealing at an IPO price of $20. Pay much more than that, however, and you might be tweeting your regrets later.”
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