Taken from the Economist
Feathering its nest
JUST a few days ahead of its planned initial public offering on the New York Stock Exchange, Twitter has raised the price range for its shares to $23 to $25, up from the original target of $17 to $20. The microblogging service and its bankers have hinted that strong demand for its stock justifies the increase. But the move, which could value the company at up to $13.6 billion, means that investors should be even more wary of taking a flutter on the firm’s stock.
True, the IPO market is hot right now, with quite a number of firms raising their initial price targets. True, too, Twitter has increased fast both the size of its audience (some 230m people visit it on average at least once a month) and its revenues. But, as we noted in last week’s issue, there are good reasons to think the firm’s shares will be overpriced.
At a valuation of $13.6 billion, Twitter would have a market capitalisation-to-trailing-12-month sales ratio of roughly 26, which is higher even than those of Facebook and LinkedIn when they went public. Yet Twitter has been coy about how exactly its advertising machine will be able to generate the billions of dollars of future revenues to justify such a lofty multiple. Rett Wallace of Triton Research, which analyses private companies, points out that Twitter has provided far less granular information about its sales activities in its regulatory filings than, say, LinkedIn did when it went public in 2011.
Those who think Twitter’s share price will soar over the long term point out that it hasn’t increased the number of shares it intends to offer and that its existing owners with big stakes aren’t cashing out en masse in the IPO. Both of these things, they say, should reassure nervous punters who fear a re-run of Facebook’s IPO. The giant social network’s share price plummeted following its debut on the stockmarket and it was many months before it rose above the initial $38 offer price again.
But one thoughtful estimate published on the same day that Twitter increased its price range concluded that the firm is in fact worth no more than $17 to $18 a share. BIA Kelsey, which analyses advertising markets and firms operating in them, says that Twitter faces some very big challenges just to get to the $5 billion of revenue a year it will need to generate by 2020 to justify a share price today of $17. Among other things, it notes that Twitter’s growth in America is slowing and that it is generating far less revenue from foreign users, who account for about four-fifths of its audience. Perhaps the hype around the IPO market right now will still make Twitter’s shares fly in the short-term. But they are unlikely to stay aloft for long.