Twitter IPO More Expensive Than Facebook Without ProfitsSarah Frier and Leslie Picker
Twitter Inc. is poised to price its initial public offering at a valuation that makes it more expensive than Facebook Inc., a profitable rival with five times as many users.
Twitter yesterday boosted its IPO price to $23 to $25 a share, which would give the microblogging service a market capitalization of $13.6 billion at the top end of the range. That would value the company at 11.8 times its estimated 2014 sales, higher than the 11.4 times price-to-sales ratio for Facebook. San Francisco-based Twitter is already several times oversubscribed at $25 a share and is set for a final offering price above that, people familiar with the situation said.
The price increase underscores how Twitter, which had a conservative IPO strategy relative to some Internet peers, is starting to shed that approach. The company initially set a range that put it at a 27 percent discount to Facebook on a price-to-sales basis, yet is now creating a higher bar for success by forcing prospective investors to pay an even larger premium for its promises of fast growth.
“A tech IPO like Twitter with no profit is an emotional event, not a fundamental event. You either believe or you don’t,” said Max Wolff, chief economist and strategist at ZT Wealth. “Above $26, I think this thing starts to look a little dicey.”
Twitter previously took steps to avoid the hype that befell the IPOs of Facebook, Groupon Inc. and Zynga Inc. Facebook, which raised its offering price range in the run-up to its IPO in May 2012, saw its shares lose more than half their value within three months of going public.
By contrast, Twitter filed its offering prospectus secretly with the Securities and Exchange Commission, spelled out more risk factors than Facebook, and picked a different lead banker. Goldman Sachs Group Inc. is leading Twitter’s offering, while Morgan Stanley led Facebook’s.
Twitter also chose to list on the New York Stock Exchange, instead of the Nasdaq Stock Market where Facebook trades. It earlier set a price range of $17 to $20 a share.
Still, while Facebook was profitable when it went public, Twitter lost $64.6 million in the September quarter, wider than the $21.6 million a year earlier. The company, which doesn’t give a target for profitability, isn’t anticipated to make money until 2015, according to analysts’ predictions compiled by Bloomberg.
Twitter has also been contending with slowing user growth. Its membership base, which stood at about 230 million people worldwide in September, is a fifth of the size of Facebook’s more than 1 billion users.
In presentations to investors last week, Chief Financial Officer Mike Gupta gave Twitter’s case for why it is a worthwhile investment. He forecast adjusted earnings excluding interest, taxes, stock-based compensation and other measures -- known as adjusted Ebitda -- to reach 40 percent, up from 6 percent in the third quarter. The company also projects gross margins in the high 70 percent range, while Facebook’s are in the low-to-mid 70s.
Gabriel Stricker, a spokesman for Twitter, declined to comment.
For Twitter, there may be no better time to go public than this week. The company will debut on the stock market as the Standard & Poor’s 500 Index is near a record high and two other social-media stocks -- Facebook and LinkedIn Corp. -- have each more than doubled in a year.
IPOs are benefiting from the euphoria, as investors pushed the Bloomberg IPO Index to a record yesterday. That may help buyers overlook Twitter’s losses and slowing user growth. It’s reminiscent of 1998 when Internet stocks surged before the market crash, according to Eric Jackson, president of Ironfire Capital LLC.
Twitter’s “on the right side of the stock-market bubble, while it’s still moving up,” said Jackson, whose hedge fund focuses on technology companies and is interested in buying shares of Twitter. It’s “another big IPO that helps the space continue its upward curve.”
The equity rally is projected to pick up momentum through the year and lift the S&P 500 to the biggest annual increase since 1997, based on historical data compiled by S&P and Bloomberg. Federal Reserve policy makers said in a statement last week that it will keep buying $85 billion of bonds each month until “the outlook for the labor market has improved substantially.”
“The most important difference between the sentiment today and 1999 is that we have almost a superstitious belief in the Federal Reserve and we have replaced dot-com with social plus mobile,” Ian D’Souza, adjunct professor of venture capital and behavioral finance at New York University, said in an interview. “Twitter may be the psychological catalyst that can finally trigger a herd-like movement of retail into equity funds causing a momentum super-spike.”
The climate for Web stocks is particularly hot, with the 77-member Bloomberg U.S. Internet Index trading near the highest valuation relative to the S&P 500 since 2007, according to data compiled by Bloomberg.
Chief Executive Officer Dick Costolo has been on the road meeting investors for more than a week. Underwriters will stop taking orders at noon today in New York before setting the final price on Nov. 6, one person with knowledge of the matter said. At $25 a share, Twitter would raise about $1.75 billion in the sale, up from the previous $1.4 billion it was seeking.
Twitter will have 544.7 million shares of common stock outstanding after the IPO, the filing shows. Including restricted stock and options, Twitter will have about 694.8 million shares outstanding. By that measure, at the top end of the range Twitter would be valued at $17.4 billion.
Twitter has said it plans to use the proceeds of the IPO to grow its advertising business, where it posts 140-character messages into people’s Twitter streams. The company also plans to invest in international expansion.
Twitter is betting it can expand its user base and target those people with advertising that cater to their interests. The company can map out what users are interested in based on who they follow.
Twitter is also touting its engagement with mobile users, where other Web companies have struggled. About three-fourths of its active users accessed the service from mobile devices in the three months ended in September, compared with 69 percent in the year-earlier period, according to the filing. More than 70 percent of advertising revenue comes from those devices, a higher proportion than Facebook.
Some investors said they remain skeptical, especially following the price boost.
“When you look at valuations and look at the lack of earnings and revenue, it seems to me much like the dot-com bubble,” said Matt McCormick, a money manager at Cincinnati-based Bahl & Gaynor Inc. who helps oversee $10.2 billion. “This market looks a little frothy and Twitter is the personification of a risky trade.”