Twitter sets IPO price at $26 a share; valuation makes it more expensive than Facebook
As a follow-up to our Twitter IPO story, Twitter has priced its IPO at $26 per share late Wednesday, ahead of its much awaited maiden offering that debuts on the New York Stock Exchange (NYSE) on Thursday. That is more than the $23-25 range announced on Monday, which valued the microblogging service at $13.6 billion at the top end of the range. However, at $26 per share, Twitter is valued at more than $18 billion, which makes it the biggest market debut for a technology firm since Facebook’s IPO in May 2012.Twitter has chosen lead banker Goldman Sachs as its underwriter for the IPO.
On 24 October, Twitter released an amended version of its prospectus filed with the SEC, according to which it planned to raise between $1.25 billion and $1.44 billion in the IPO. Twitter had then set its price range at $17-20 per share, which valued the company at up to $11.1 billion.
Is Twitter an Expensive Proposition?
Even at $23 to $25 a share, Twitter would be valued at 11.8 times its estimated 2014 sales, higher than the 11.4 times price-to-sales ratio for Facebook. It is interesting to note that Twitter is already several times oversubscribed at $25 a share!
Twitter had initially set a range that put it at a 27% discount to Facebook on a price-to-sales basis. Shedding its conservative IPO strategy with the new pricing of $26 per share,Twitter is bent on creating a higher benchmark for prospective investors to dole out a premium due to its high growth potential over the next few years.
Deeper Into the Red
While Facebook was profitable when it went public in May 2012, Twitter went deeper into the red with losses of $64.6 million in the September quarter compared with losses of $21.6 million in the year-ago period. Strangely enough, the company doesn’t provide investors a target for profitability and is not anticipated to break even until 2015, according to Bloomberg. Moreover, Twitter’s user base, which stood at about 230 million people worldwide in September, is just about one-fifth of Facebook’s user base of more than one billion.
Twitter to Debut at the NYSE Selling 70 Million Shares
Twitter is selling 70 million shares, which will raise $1.82 billion, for the company which is far lesser than the $16 billion that Facebook Inc. raised in May 2012. However, Twitter is also setting aside a greenshoe option to sell an additional 10.5 million shares depending on the performance of the stock after its initial trade. Unlike Facebook, Twitter has chosen to trade its shares on the NYSE under the symbol “TWTR”.
Is Twitter a Worthwhile Investment?
While Main Street investors find the IPO expensive, Twitter’s Chief Financial Officer Mike Gupta has forecast adjusted EBITDA to reach 40% in the coming quarter, up from 6% in the third quarter. Moreover, gross margins are expected to be in the high 70% range compared to Facebook’s low-to-mid 70s. Another important factor to be considered is the strategic timing of the IPO. The IPO will hit the market at a time when 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. The IPO is also likely to benefit from the record high of the Bloomberg IPO Index, helping buyers to possibly overlook Twitter’s losses and slowing user growth.
Who Will Rake in the Money?
Twitter’s co-founder Evan Williams is the company’s largest individual shareholder with a 12% stake, which is worth nearly $1.5 billion. Peter Fenton, a Twitter board director and an early investor in the company, owns a stake worth $820 million. Williams’ fellow co-founder Jack Dorsey holds shares worth about $610 million, and company CEO Dick Costolo has a nearly $200 million stake. Six institutional investors own 5% or more of Twitter. The biggest winner is private equity firm Rizvi Traverse, which holds a nearly 18% stake worth $2.2 billion.
According to the company’s filing with the SEC, Twitter will have 544.7 million shares of common stock outstanding after the IPO. Including restricted stock and options, Twitter will have about 694.8 million shares outstanding, according to which Twitter would be valued at $17.4 billion. The IPO proceeds will be mainly used to increase its capitalization and financial muscle, while enabling access to the public equity markets. In addition, part of the proceeds will be used for general corporate purposes, including working capital, operating expenses and capital expenditures. A portion of the net proceeds will also be used to acquire businesses, products, services, or technologies. Additionally, twitter has recently raised $1 billion credit line to support its capital requirement and expenditures.
The Way Ahead
Twitter does look expensive at $26 per share with current losses in its account. However, with strong user growth projections, healthy revenue projections for 2014, and growth potential of its Mobile Advertisement segment fuelled by the growing Smartphone industry, we continue to go with a price target of $35 in the near term. It also looks like a perfect timing for the IPO, with major indexes like the S&P and the DOW Jones Industrial Average close to their all-time high.
It’s important to see how the most talked about Twitter IPO shapes up today, given that prior social media IPOs have failed to allure the investors during initial days and set them on a back foot.