Profits don’t appear a concern as rumours swirl over price of Twitter’s IPO
Investment bankers will be pulling many all-nighters in an attempt to guess the right share price
Like many tech IPOs, Twitter’s is going to be hard to price. Photograph: Niall Carson/PA Wire.
Like many tech IPOs, Twitter’s is going to be hard to price. Earnest analysts have already popped up on the usual business channels proclaiming the need to “watch the valuation”. Good advice, but hardly insightful and, I suspect, probably beside the point. The experience of Facebook’s IPO last year - and many a pets.com style launch before it - suggests that value is the last thing on the mind of the investment banker hired to get this sale done.
We know that Twitter has around 200 million users who so far have managed to send nearly 500 billion tweets. We also know that the company must have revenues below $1 billion, otherwise it couldn’t have availed of new laws in the US that keep IPO filing details confidential. Twitter shares do exist but they are not publicly traded or listed: employees and the early providers of venture capital are the most probable holders of these shares.
Naturally enough bloggers and tweeters are a rich source of rumours and stories about the likely valuation. Type “Twitter valuation” into Google and you will get over 14 million suggested links. The bloggers who usually seem to be well connected in these matters are dropping hints that Twitter has received bids from assorted hedge funds at around $27 per share, valuing the company at around $14 billion.
That contrasts with mainstream media reports, based on recent private transactions, of a likely valuation around $10 billion, although I have seen one US news source say that the company is heading for a capitalisation of $20 billion. The only hard (but nevertheless indirect) information on valuation is to be found, potentially, in the filings of publicly listed companies that own the unlisted Twitter stock. One such that I found, from earlier this year, put the company on a valuation of $9.8 billion (equation to a share price of roughly $18.50).
Notice that we have managed to get this far without talking about profits. As far as I can tell, nobody outside the company actually knows whether or not Twitter makes any money, although industry “insiders” do say that the company is profitable.
So, in common with many other tech companies at similar stages of evolution, the focus is on revenues. Market sources, as they say, put advertising revenues (the only ones of any significance we think they have) at around $600 million for Twitter in 2013, roughly double what they made last year. For those who like comparisons, Google’s revenues in 2012 were roughly $50 billion and Facebook’s were $5.1 billion.
As we know from the Facebook experience, from which the market hopes Twitter has learned, these IPOs can be very hit-and-miss affairs. Facebook’s share price bombed after the sale and has only recently climbed back into the black. But there can be very positive experiences: LinkedIn’s share price is 450 per cent above its May 2011 sale price.
Investment bankers will be pulling many all-nighters in the weeks ahead seeing how many ways different fingers can be stuck up into the air in an attempt to guess the right share price. They will have to estimate how quickly those recent revenues will double, and double again - and probably double again. They will have to make further guesses about how quickly Twitter’s expenses will grow. And then come up with a share price. An unenviable task but one that will be fabulously rewarded.
A lot of Twitter revenues apparently come from “sponsored Tweets”. I don’t know about other users, I would like to switch these off, but I suspect that option doesn’t exist. If this is the way Twitter is to grow its revenues, then these irritating advertisements are going to become more frequent. I wonder how big a turn-off that will be for Twitter fans.
LinkedIn has worked because investors can see the different ways that business can make money. It seems to be a combination of premium fees and advertising. One of the favourite activities of those highly qualified, professional LinkedIn users is checking out who has been looking at their on-line profile. LinkedIn cleverly charges for a lot of this type of activity.
Twitter is still a long way from proving that it can do something similar but there does appear to be a strong feeling that the 200 million user base can only grow and that money will be made, even if we can’t quite work out how. Maybe all that “Big Data” that Twitter generates can be fed through some new algorithms and the results sold to companies, or governments, hungry for that sort of thing.
I think the IPO share price should be 140.