Twitter – Will it Follow Facebook’s Shaky Path or LinkedIn’s Rocket Trajectory?

Edited by Vani Rao

Twitter (NYSE: TWTR) has finally taken its much hyped flight; the stock initially priced at $26 per share quickly surged 90% to $50.09 per share before ending its first day of trade at $44.90, 73% higher than its offer price.

Twitter Price Movement during its First Day of Trade

Source: Bloomberg
Source: Bloomberg

While Twitter is yet to report profits and has just one-fifth of Facebook’s active user base of more than one billion, it is still valued higher than Facebook on the first day of its trading. At the current price of $44.90, Twitter is valued at $24.4 billion, 22 times than its estimated 2014 sales of $1.14 billion. This makes it one of the most valuable technology companies in the world. Twitter’s price-to-sales stands much higher than its peers like Facebook and LinkedIn, which trade at 11.2 and 11.7 multiple of its 2014 sales, respectively.

However, it still remains to be seen how Twitter’s shares fare in the ever demanding market, where every point is scrutinized and every mistake punished. Prior to Twitter, social media giants like Facebook, Zynga, and LinkedIn failed to retain investor interest post their IPOs.

Facebook, Zynga, and LinkedIn Price Movement since IPO

Source: Bloomberg
Source: Bloomberg

Zynga Inc. (NASDAQ: ZNGA)

The largest internet gaming giant went public in December 2012; at that time, the company was valued at $10 billion with shares offered at $10 per share. On the very first day of trading, Zynga’s stock fell 5% to $9.50. As of today, the company is worth a mere $3.46 billion, which translates into a 65% decline from its IPO price.

LinkedIn Corp. (NYSE: LNKD)

LinkedIn Corp. is one social media site that has consistently set a higher benchmark among its peers. Its share prices more than doubled to $94.5 per share as compared to its offer price of $45 per share. LinkedIn is currently trading at an impressive $211.47, an astounding 370% growth in two years.

Facebook Inc. (NASDAQ: FB)

Facebook Inc., the social networking giant, went public in May 2012 with an offer price of $38 per share, valuing the company at more than $100 billion. Post the listing, Facebook’s initial journey was painful and its shares fell more than 50% to $17.72 in September 2012. Moreover, it took more than a year before the stock returned to its initial price.

It will be interesting see which way Twitter goes from here, whether it follows Facebook’s shaky path and get corrected to a level below its offer price or follows LinkedIn trajectory and double investor’s money in coming years?

What to Expect Next

While Facebook and LinkedIn were already profitable when they went public, 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. We don’t anticipate Twitter becoming profitable anytime before 2015. Twitter’s higher opening primarily reflects its perfect IPO timing and well-planned IPO listing. We still believe its higher listing price does not change the underlying valuation for the stock. We expect Twitter to generate around $1.15 billion of sales during FY 2014 and with a price-to-sales multiple of 17, we value Twitter Inc. at $20 billion, much lower than its current valuation of $25 billion at a price of $44.90. We maintain our target price of $36 in the near term, with the upside risk of better-than-expected revenue growth. Anything above $36 will risky for investors to get into this stock.

Be the first to comment

Leave a Reply

Your email address will not be published.