Friday, October 4, 2013

Now It's Twitter's Turn

Now it's Twitter's turn. It hesitated for the past year or so. This week (Oct., 2013) it bravely stepped into IPO waters, taking the first big step by sharing publicly its SEC filing and letting the financial world see its bottom line.

Twitter's hesitation, like all companies contemplating issuing stock to the public for the first time, results from trying to determine the optimal moment to sell stock in equity markets. That's often tied to market interest in the stock issue, supply and demand for the stock, and general equity-market trends.

Its hesitation may have also resulted from other factors: (a) its being shy about letting the world pore through its true financial performance and (b) its desires to avoid the IPO debacle Facebook experienced last year at Nasdaq with Morgan Stanley as the lead underwriter.

Twitter through the years has had to wrestle, too, with management and organizational issues. Some of those problems have been resolved, and the company has moved on to capitalize on its soaring popularity around the world.  In the filing, Twitter reports 218 million users on average each month this year, up 44% from a year ago.  Not quite Facebook numbers, but sufficient growth to get prospective investors interested and excited. Twitter might argue that the value or meaningfulness of ongoing usage is different than account activity in, say, Facebook or Linkedin. Hence, it's not how many use the site, it could argue as it sells new stock, but who uses it and how it's used. 

Because of the planned IPO, Evan Williams and Jack Dorsey, Twitter founders, can now calculate more accurately their fortunes (over $400 million each). A handful of venture investors will have a nice payday, as well.

Twitter in the filing divulged what many thought was the case. It continues to have losses with no signs those losses will turn into profits in the short term.  Investors in its stock, therefore, will bet that the company will continue to experience stellar growth in users, will find even more effective ways to generate advertising revenues, and will eventually turn losses into steady, growing profits by keeping costs under control.

The company will raise $1 billion in the IPO offering.  Investment bankers advising Twitter have suggested the company today has an implied market value of about $10 billion. How then does the company have such value, the corporate-finance novice asks, when the company reports losses with no expectations of profit in the short term?  SEC documents indicate the company lost $79 million last year and $69 million in 2013 to date.

Investors who will buy the stock are assuming profits are on the horizon. They will come because there are still vast opportunities to grow the number of users, grab more advertising dollars, and, therefore, increase total revenues substantially. They will buy the stock based on expectations, not based on history.

For now, investors and those who assess the value of the firm will value the company based on a reasonable estimate of growth prospects and based on refined projections of users and revenues. Revenues for the six months, 2013, doubled from the previous year, Twitter reports, while number of users continues to grow.

Investors and advising banks have Facebook and Linkedin as convenient benchmarks:  They study and compare current market values of those companies' stocks, their numbers of users, the activity in the millions of accounts and the level of sales and sales growth.  Investors will, too, assume the company, now under the guidance of CEO Dick Costolo, will invest in whatever technology is necessary from year to year to keep the engines going.

Twitter has few competitor threats. No other social network is about to topple it in doing what it does best in those 140 characters. But Twitter, along with Google, Facebook, and Linkedin, all chase after the same pool of advertising dollars. Companies seeking to advertise digitally must decide where they can get the biggest Internet bang without particular regard to the specific roles social networks play.

Goldman Sachs, winners of the investment-banking shoving match, will be the lead underwriter and will be assisted on the front lines by Morgan Stanley and JPMorgan.  The challenge they have as advisers, besides setting precisely the price of a single share, is to form a view of markets in the face of October's U.S. Government shut-down and recent equity-market uncertainty. But that's why they will be paid tens of millions of fees. They must step up and make such decisions and, especially after last year's rough launch, avoid a 2012 Facebook near-catastrophe.

Tracy Williams

See also:

CFN:  Facebook:  The Lucky Underwriters, 2012
CFN: Facebook Stock:  What's Going Wrong? 2012
CFN:  Did Goldman Overpay for its Facebook Stake? 2011

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