Hot Off The Wire – 16 September 2013

Twitter is ready to make its debut in the financial markets via its much-awaited IPO. Twitter announced the news via a tweet: “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.”

Fig1-16092013Twitter, founded by Jack Dorsey in 2006, is an online social networking and micro blogging service that enables users to send and read “tweets,” which are text messages limited to 140 characters. Since then, Twitter has more than 500 million registered users and more than 200 million active users who create more than 400 million Tweets every day.

To loosen some of the regulations surrounding the IPO process, Twitter confidentially filed for the IPO under a Jumpstart Our Business Startups (JOBS) 2012 Act, which allows it to keep the IPO under wraps if it has less than $1 billion in annual revenue. It will also save Twitter from harsh public assessment and scrutiny.

Twitter’s filing under the JOBS Act is a clear indication that it wants to keep its profile low and not repeat the mistakes made by Facebook, Zyanga and LinkedIn. Each one of these social network sites had declined by around 50% in the months following their IPO. Filing under JOBS will enable Twitter to get feedback from securities regulators regarding its reported revenue and expenses and enable it to avoid repeated amendments like Groupon had to go through during its IPO.

Market has valued Twitter around $10 billion, based on private sales of employee stocks to BlackRock earlier this year, which is much lower than Facebook’s initial valuation of $100 billion. The company brought in $245 million in revenue last year, with an operating income of $3.1 million, according to Privco, a research firm that studies private companies.

Social media stocks like Facebook and LinkedIn are trading at extremely high P/E ratios, which indicates that Internet and social media stock valuation is mostly driven by sentiments and fuelled by the growth potential of the industry. WSA expects Twitter’s revenue to rise above $1 billion in the next three years and its stock to be priced in the $18-$20 range. Rise in smartphone usage, the popularity of micro blogging in emerging markets like China, along with Twitter’s 20+ acquisitions in the past two years, is likely to fuel the Twitter growth story. Most of the acquisitions Twitter has made in last 2 years, work on media analytics platforms, which, we believe based on the big data paradigm, is the wave of the future.

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