Twitter Surges in Trading Debut After $1.82 Billion IPOSarah Frier and Lee Spears
Twitter Inc. jumped 73 percent in its trading debut, as investors paid a premium for its promises of fast growth.
The stock rose to $44.90 at the close in New York from the initial public offering price of $26, delivering the biggest one-day pop for an IPO that raised more than $1 billion since Alibaba.com Ltd. debuted in 2007, according to data compiled by Bloomberg. Twitter sold 70 million shares, raising $1.82 billion.
The microblogging website picked a price that valued it higher than Facebook Inc. and still drew more interest than anticipated. The San Francisco-based company, which is unprofitable and has one-fifth as many users as Facebook, is benefiting from investors’ thirst for companies that will grow quickly in expanding markets like mobile advertising.
“The company did everything to secure the most cash for itself while leaving some money for the IPO buyers,” said Josef Schuster, the founder of IPOX Schuster LLC, a Chicago-based manager of about $1.9 billion. “You need a pop at the opening to leave a good taste with everyone. They did a pretty good job managing the whole situation.”
At the current price, Twitter is valued at $24.9 billion, or 22 times estimated 2014 sales of $1.14 billion, according to analyst projections compiled by Bloomberg. That compares with 11.2 times that Facebook traded at today, and price-to-sales ratio of 11.7 for LinkedIn Corp.
Facebook declined 3.2 percent, and LinkedIn fell 4.2 percent today. At its market debut in 2012, Facebook’s stock was flat, propped up by bankers, while LinkedIn’s more than doubled on the day it went public in 2011.
The pricing puts the onus on Twitter to deliver on its promises of fast growth after earlier pitching shares as low as $17. Chief Executive Officer Dick Costolo has rallied investor interest in Twitter’s rapid sales curve -- with revenue more than doubling annually -- even with no clear path to making a profit.
The company received orders for about 30 times as many shares as it offered at the $26 IPO price, a person with knowledge of the matter said. About 8 million of the shares, or 11 percent of the total in the IPO, were allocated to retail investors, the person said, asking not to be identified because the information is private. A typical retail allocation is 10 percent to 15 percent.
Still, any price over $40 reflects “hype” and makes Twitter too risky of an investment, said Jeffrey Sica, president and chief investment officer of Sica Wealth Management LLC in Morristown, New Jersey.
“I anticipated a very strong open, but when you start to approach these levels this is absolute froth,” he said. “There is nothing supporting this range. I think this is just way, way above what realistically we should be considering a stable open.”
Brian Wieser, an analyst at Pivotal Research Group in New York, downgraded Twitter to a sell rating with a $30 price target.
“If you’ve got it, sell it,” Wieser said in an interview. “If there are willing buyers who have a view of the business today that gets them comfortable with this valuation then those people should hold it, but I can’t get there, and I’m not recommending my clients to hold it.”
CEO Costolo was at the New York Stock Exchange for the stock’s debut under the TWTR symbol, along with CFO Mike Gupta and co-founders Evan Williams, Biz Stone and Jack Dorsey.
After the celebration at the exchange, executives dispersed. Costolo went to the New York Twitter office to talk to employees, then flew to Twitter’s San Francisco office to do the same. Twitter’s website and applications let people post 140-character messages to friends and online followers. Dorsey sent a tweet to congratulate the company’s executive team, receiving more than 200 retweets.
“My first of four client presos today starts in 10 mins. Back at it,” Adam Bain, Twitter’s president of global revenue, said in a tweet.
Twitter’s $1.82 billion IPO is almost as much as the $1.9 billion that Google Inc. raised in its 2004 IPO and makes it the largest IPO by a U.S. technology company since Facebook’s debut in May 2012. Goldman Sachs Group Inc. led the sale, working with Morgan Stanley and JPMorgan Chase & Co.
The price rise underscores how Twitter has so far sidestepped some of the pitfalls that befell Facebook’s IPO last year. Facebook’s offering was marred by a trading snag on the Nasdaq Stock Market and investor backlash over its valuation. The company at the time was priced at 107 times trailing 12-month earnings on a fully diluted basis, making it more expensive than 99 percent of all companies in the Standard & Poor’s 500 Index. Facebook saw its stock quickly sink below its $38 debut price, a level it didn’t cross back above until this August.
By contrast, Twitter decided to list on the New York Stock Exchange and chose Goldman Sachs to lead its offering, while Morgan Stanley led Facebook’s IPO. The company also sought to avoid hype by filing for an IPO secretly with the Securities and Exchange Commission and earlier setting a price range for its shares at a discount to competitors.
Twitter’s stock gain may erase some of the aftertaste of the Facebook, Zynga Inc. and Groupon Inc. IPOs, each of which lost half their value within six months of their debuts, sending a chill over consumer-technology IPOs and some Silicon Valley startup valuations.
Demand for Twitter’s stock exceeded the supply even before bankers started formally asking for orders, people familiar with the matter have said. On Monday, Twitter raised the proposed price range for the 70 million shares sold in the IPO to $23 to $25 each, up from the earlier range of $17 to $20.
“People are really looking all the way out to their 2015 and 2016 revenue estimates to price this,” said Larry Levine, a partner in financial-advisory firm McGladrey LLP in Chicago. “The risk to buying Twitter is if Twitter does not achieve its very lofty growth estimates.”
Twitter will have 544.7 million shares of common stock outstanding after the IPO, its filings show. Including restricted stock and options, Twitter will have about 694.8 million shares outstanding. The sale didn’t include an extra 10.5 million shares that underwriters have an option to buy, according to the company’s prospectus.
The offering caps a journey for Twitter from a niche short-messaging service to a global social-media platform for celebrities, politicians and others. Started in 2006 as a project at failed startup Odeo, the website now logs more than 500 million tweets each day, the company has said. That’s up from 2 million a day in January 2009.
“I have e-mails going back to 2009 asking me about when Twitter is going public,” said Bijan Sabet, a general partner at Spark Capital, which owns about 6 percent of Twitter’s shares, worth $1.46 billion. “And before that, e-mails asking when Twitter is going to generate revenue. This company has always had a lot of pressure. They took their time in figuring out the best way to go public and the right time to go public.”
Twitter still needs to deliver on its business model. Twitter’s loss widened to $64.6 million in the September quarter from $21.6 million a year earlier, and it is unlikely to be profitable until 2015, according to the average estimate of analysts surveyed by Bloomberg. LinkedIn and Facebook were both profitable at the time of their IPOs.
While Twitter’s revenue has surged, reaching $534.5 million in the 12 months that ended Sept. 30, user growth is slowing, filings show. The service had 231.7 million monthly users in the quarter that ended in September, up 39 percent from a year earlier. That compares with 65 percent growth in the prior year.
Twitter has been touting its engagement with mobile users, where other Web companies have struggled. About three-fourths of Twitter’s 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.
The money from the public offering will help Twitter build its business outside the U.S., where it got 77 percent of users yet only 26 percent of revenue in the third quarter. The company will also expand its infrastructure and work on products that will help it attract more users and advertisers.
“All that points to a lot of upside,” said Paul Zwillenberg, a London-based partner and managing director at the Boston Consulting Group.