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Nov 7, 2013

The Twitter IPO: All You Need to Know

You might have heard: Twitter had an IPO today. It achieved a market capitalization of $25 billion to $26 billion, even though the company has yet to hit $1 billion in revenue and has not earned a dime of profit. But clearly, people were excited.

Not for Your Average Joe

The company, now listed on the New York Stock Exchange (NYSE), sold 70 million shares at an IPO price of $26 per share, raising $1.8 billion in capital for the company.

But that doesn't mean the average Joe was able to buy Twitter at $26. As soon as the stock started trading, it opened above $40. It hit a high of $50 before falling back slightly. It was recently trading at $46.

The only people who could get shares at $26 were those with an investment banking relationship who were able to receive an "allocation." Some of these were traders who were able to flip the shares into the market at a quick profit.

This means there was more demand for the shares than was priced into the IPO offering. Pricing an IPO is always a delicate game for the bankers who set the price. If they price shares too high, the price falls when the stock hits the market. An oft-cited example of this was the Facebook IPO. You remember … the share price plunged after the IPO. Not only that, but the Facebook IPO was plagued with technical problems. The Twitter IPO went much smoother.

In the case of Twitter's IPO, the market gave the shares an immediate $20 premium, meaning, they "left money on the table." That's because with such high demand, the company could have sold shares at a higher price before it traded publicly. The Twitter bankers left about $1.5 billion on the table by pricing it at $26 (70 million shares times a $20 share premium on the open market).

But they might be okay with that because it made the market "feel good," and they got plenty of money.

The Underwriters

Goldman Sachs was the leader underwriter on the deal — of course. Co-underwriters included other big names such as JPMorgan Chase and Morgan Stanley. Bloomberg expects Goldman and the other bankers will make about $60 million in fees off the IPO.

A quick recap of the basics:

  • IPO Shares sold: 70 million at $26, raising $1.8 billion for the company
  • Lead Underwriter: Goldman Sachs
  • Market cap: $25 billion to $26 billion
  • Founders take: Co-founder Ev Williams owns 70 million shares, worth about $2.7 billion. Co-Founder Jack Dorsey clocks in at 23 million shares and $1 billion.

Is Twitter Worth It?

Whether Twitter is worth its valuation is anyone's guess. There is no conventional answer, because this is not a conventional situation. Typically investors analyze a company's value based on the potential profitability of the company and how fast it will earn back invested capital.

But by achieving at least a $25 billion valuation without ever having achieved a profit, Twitter has no track record on profits. It has achieved a valuation among the most successful companies on earth before it has returned any capital at all. This is incredibly rare. The last time something happened like that was in 1999. Does that make you feel better? 

Since Twitter's inception, the company has burned through an accumulated deficit of $418 million, according to SEC filings. From the company's S-1 statement with the SEC:

Although our revenue has grown rapidly, increasing from $28.3 million in 2010 to $316.9 million in 2012, we expect that our revenue growth rate will slow in the future as a result of a variety of factors, including the gradual slow down in the growth rate of our user base. We believe that our future revenue growth will depend on, among other factors, our ability to attract new users, increase user engagement and ad engagement, increase our brand awareness, compete effectively, maximize our sales efforts, demonstrate a positive return on investment for advertisers, successfully develop new products and services and expand internationally. Accordingly, you should not rely on the revenue growth of any prior quarterly or annual period as an indication of our future performance."

 

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Source : cmswire[dot]com

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