Twitter Inc. (NYSE: TWTR)
70M-Share IPO Priced At $26 Per Share
Social-Media Company Initially Targeted $17-$20 Price
The shares are set to open for trading Thursday morning on
the New York Stock Exchange. NYX +0.78%.Twitter originally estimated a share-price range of $17 to
$20, and then Monday raised that range to between $23 and $20.
It’s Too Expensive
On Monday, Twitter raised its projected IPO price to $23-$25
per share, up from $17-$20, valuing the company at $17.4 billion.
In the first three quarters of the year, Twitter lost $133.8
million, nearly double the $70.7 million loss from a year ago. However, revenue
has more than doubled in 2013, to $422.2 million.
Compare that to Facebook (NYSE: FB), which hauled in $4.85
billion in revenue. Granted, Facebook’s market cap is seven times larger than
Twitter’s, but Facebook is profitable.
In fact, Facebook is projected to earn $1.90 per share in
2016, giving the stock a 2016 forward price-to-earnings ratio of 26, which is
actually cheap when you consider that the company is expected to grow earnings
by 32% per year over the next four years.
Twitter is not expected to earn any money until 2015 at the
earliest. In 2016, Wall Street predicts Twitter will earn $0.31 per share,
though that estimate may change when more analysts release earnings models
after the IPO.
At $0.31 per share in earnings and assuming a $24 stock
price (the middle of the expected IPO price range), the stock has a 2016
forward P/E of 77.
Its IPO valuation puts its price-to-sales ratio at 27 based
on 2013′s projected numbers. That compares to a P/S of 16 for Facebook.
A Growth Stock?
But as Barron’s puts it, “potential investors are undaunted:
Twitter’s appeal is its growth.”
I don’t deny that the company will grow revenue and profits
over time.
But do you want to own a stock that may or may not earn a
profit in a few years, with very little clarity on how much profit it will earn
once it finally stops hemorrhaging money?
What concerns me about Twitter is that by the time it turns
a profit (or maybe even before) some new thing might come along. It wasn’t that
long ago that Rupert Murdoch bought MySpace for $580 million, selling it six
years later for a paltry $35 million. The reason for its demise? Facebook.
Could something similar happen to Twitter? I don’t see why
not. Twitter is a great tool to succinctly deliver a message. You can use only
140 characters in a tweet.
It seems like someone could replicate Twitter’s
effectiveness, but perhaps allow 150 characters. Kind of like 7 Minute Abs
instead of 8 Minute Abs.
Of course, I’m joking. I don’t think a 150-character copycat
of Twitter will lead to its collapse, but I do think it’s possible the next
social networking technology could impact its business in a negative way, like
Facebook did to MySpace.
Quick Pop
I would not be surprised if Twitter’s stock pops on the IPO.
There is a large amount of buzz about it, and it appears the offering is being
managed in a smarter way than Facebook’s.
Facebook sold lots of shares at the highest price possible.
Facebook shares are now 29% higher than the IPO price, but shareholders were in
the red for a while.
Twitter is selling only a small portion of the company and,
though it raised the price recently, seems to be trying to handle it in a way
so that investors don’t get hurt like they did in Facebook.
But Twitter is expensive, is in a business with little
barrier to entry, has an unproven business model and is not expected to be
profitable for at least another year.
There are plenty of stocks out there with better
fundamentals. Twitter is a pure speculation at this point. You’re better off
spending time on Twitter rather than owning it.
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