This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.
Twitter, in what must have been a world first, announced its plan for an IPO via a tweet in early September, and will float on the New York Stock Exchange on 7 November. The micro-blogging platform has been steadily growing in popularity ever since it was launched in 2006, and currently boasts around 200 million users.
Generally speaking, floating allows a company cheaper access to capital, which may be used for expansion, increases its prestige and public image, and enables it to monetise the investment of early private investors. Going public at a time when social media stocks are very much in vogue can certainly do no harm.
One of the distinct disadvantages of an IPO is that private business information, which could prove advantageous to a competitor, must be revealed in the initial prospectus. Twitter has succeeded in avoiding this problem due to the fact that its annual revenue is under $1 billion, and has thus been able to privately submit its intentions to the Securities and Exchange Commission.
Avoiding Facebook's mistakes
An unsuccessful IPO is something that underwriters of the flotation will be keen to avoid. The extensive hype in advance of the Facebook IPO – blamed to an extent for its less-than-impressive debut on the stock market – has been avoided. The decision to list on the NYSE was also clearly inspired by the disastrous delay in Facebook trading, due to a glitch in the NASDAQ computer.
Twitter has announced a range of $17 and $20 for its stock price, which would value the company at $11.1bn. The company has stated in a regulatory filing that it will put forward 70 million shares in the offering, which will make up 13% of the company. IPO prices are normally set slightly lower than the value at which the stock is expected to trade, in order to attract investors and insure a liquid secondary market. So far, speculation that a heftier price tag will be set by the underwriters just before trading commences seems to be just that – mere speculation. Twitter may well have learned once again from the Facebook experience that hiking the price range in advance is not necessarily a wise move, even if the demand is many times oversubscribed versus the actual stock supply.
So, all in all things looks positive for Twitter. What could go wrong?
Is optimism for further stock price upside misplaced?
It doesn’t make sense to invest in an IPO unless you think the company will outdo the market’s estimates. As it stands, many have pointed out that the initial pricing of the stock is rather conservative, and as a result both retail and institutional investors are giving a warm welcome to this placement. IG’s grey market shows that our clients are expecting the market capitalisation to be around $22 billion – this implies that the stock will trade at least double the company pricing on the first day of trading.
Facebook was, and is, a much bigger company — it had 900 million users when it went public, and has more than a billion today — and its size was one of its big selling points. The recent admission from Facebook’s CFO that the site is going out of fashion with the important teenage demographic should and has worried shareholders. Whether Twitter will be a beneficiary or a potential casualty of this slide in young users remains to be seen.
Also unlike Facebook, Twitter has yet to turn a profit. The company reported a net loss of $79.4 million on revenue of only $316.9 million in 2012. Given its active user base the company does have great profit-making potential, but monetising this potential is a different story – something that early investors in Facebook learned the hard way.
Extracting revenue from advertising via mobile devices is a key tenet for future growth and profitability. One would think that Twitter has the front foot on this, relative to when Facebook went public, as over 70% of its user base accesses its service on a mobile device. The company also claims that 70% of its advertising revenue was generated from mobile devices and tablets in the last quarter. The expansion into promoted tweets over the past 18 months, and the move towards targeted ad tweets in more recent months, should parlay well on the balance sheet.
The company’s growth will also depend heavily on expansion in other markets, as 77% of monthly active users logged in from outside the US in the last quarter. Reaching out to countries like France, Japan, Russia and South America, and of course deriving revenue from those users, will be of key importance to profitability.
Twitter is a great marketing channel with many celebrities now being paid to tweet about products. I’m personally a big fan; the ability to follow other members and create a timeline of what is deemed important and interesting to the individual user, the diverse articles posted that one would not normally see and, best of all, the instant access to breaking news before any other medium have rendered the service indispensable.