How many will follow Twitter's shares?

Saturday, 14 September 2013 - 8:55am IST | Agency: Daily Telegraph
Social network's IPO move is a surprise, leaving some to wonder if it is too early and if the $15bn valuation is right.

Twitter surprised Silicon Valley, Wall Street and even its own employees when it revealed that it had filed documents for an initial public offering with American regulators. The microblogging company has been tipped for a flotation for years, but most observers did not expect it to act until next year at the earliest.

Staff were caught off guard by Thursday's internal announcement, but with many of them sitting on generous stock options, it was not an unpleasant surprise. Twitter shared its plans with the rest of the world with characteristic brevity, in a tweet that fell short of its 140-character limit. It said: "We've confidentially submitted an S-1 to the SEC for a planned IPO.

This tweet does not constitute an offer of any securities for sale." Moments later it added: "Now, back to work." Estimates based on trades by Twitter staff and private investors peg the valuation at about $15bn. That would make Twitter, seven years old with a staff of about 1,000, roughly five times more valuable than fellow 2013 British stock market debutant Royal Mail, which can trace its history to Henry VIII and has 150,000 employees.

Potential Twitter investors must rely on such estimates because the company is taking advantage of new laws allowing companies with annual revenues of less than $1bn to keep financial details secret in the early stages of their flotations. The legislation was introduced by the Barack Obama administration last year to encourage more start-ups to go public, to pump more cash into growing digital businesses.

Twitter, with its massive audience and A-list Silicon Valley connections, has never been short of investment, but it is happy to make the compliance savings offered by the new laws. Observers are reliant on a combination of informed estimates, leaks, rumours and outright speculation as they attempt to weigh up what will be the highest-profile Wall Street flotation since Facebook.

Ian Maude, a digital media analyst at Enders, said: "Everybody is a bit surprised about the timing, we were expecting them to wait a bit more. But, arguably, Facebook waited too long." The shadow cast by Facebook's disastrous Wall Street debut was seen as a good reason for Twitter to bide its time.

Starting at $38 per share, the value of Mark Zuckerberg's company nearly halved within weeks, having gone public at a time when its revenue growth was decelerating and it had been forced to reveal serious strategic concerns about the migration of its audience to smartphones.

Now, 18 months later, Facebook has recovered. Its mobile advertising business is booming and revenue growth is speeding up. Underwater until last month, the shares have climbed to nearly $45. There's every sign that Wall Street is hungry for more technology stocks.

LinkedIn, the professional networking website, raised $1.2bn in an oversubscribed secondary offering this month. It is trading at a price-to-earnings multiple of more than 730, prompting fears of a technology bubble. But the parallels with the dotcom boom and bust at the turn of the century are limited, according to Paul Cooper, a partner at technology and media investment advisers Clarity.

"The valuations are not ludicrous when you look at the revenue growth curve of these companies," he said. "If you're a price-to-earning ratio investor then you shouldn't be looking at these fast-growth companies, but we're only just beginning to see the potential of how they can monetise their massive audiences." Twitter's revenues this year are expected to come in between $500m and $600m, roughly double last year.

It is making big investments in its sales operation, such as the $300m acquisition this week of the mobile advertising technology provider MoPub. Meanwhile, Vine, Twitter's video clip app, will allow it to move into the increasingly lucrative online video advertising business.

The biggest cloud on Twitter's horizon, according to analysts, is the relatively sluggish growth of its user base. While more than half of Britons and Americans use Facebook, Twitter, with its focus on news and real-time updates, is a niche product by comparison Maude said: "Twitter is doing a really good job monetising its audience, but the challenge is whether it can become truly mainstream. Is it a news service or is it a way to follow your friends? It certainly has a less broad appeal than Facebook." That may be so, but Twitter's popularity among investors looks assured.

Risky Twitter IPO requires a leap of faith by investors The big question is whether Twitter can turn its users into cash. Don't be distracted by rapid revenue growth, the only number that really matters for investors is after-tax returns, writes John Ficenec. Comparable companies such as Facebook and LinkedIn both reported encouraging signs recently.

Facebook posted a profit for the second quarter of 2013, reversing a loss in the comparable period. However, Questor would like to see a full year's audited results rather than just three months' trading. Facebook shares, at about $44 (pounds 28), are now above the $38 float price. Another concern is that Twitter's market has low barriers to entry. Facebook was started in a dormitory room. The next big thing can become yesterday's news overnight.

The technology space is littered with calamities: Bebo, the social network was once valued at $850m, it recently sold for $1m. This raises the spectre of a permanent loss of capital. Given the unproven earnings and clear risks, Questor is happy to let this one fly by. However, those willing to take a leap of faith should contact their broker for details.


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