Ahead of its highly-anticipated public debut, Twitter priced its initial public offering Wednesday evening at a $26 per share, which is 40% above the social-media company’s earlier range.
The valuation highlights the strong demand for the micro-blogging company, whose potential has captured the imagination of investors but financial profile remains immature. Twitter has yet to turn a profit, has seen its losses accelerate and is valued at a relatively expensive level when compared with other recent tech IPOs.
In a tweet, Twitter revealed it priced its shares at $26 a piece, allowing it to raise as much as $2.1 billion. By raising that amount, Twitter will become the second-largest Internet IPO by an American company, behind Facebook’s $16 billion but just ahead of Google’s $1.92 billion, according to Dealogic. At that price level, Twitter would have a market capitalization of $14.4 billion.
Twitter, which was founded in 2006 and is based in San Francisco, originally expected to price its IPO at $17 to $20 per share, but then raised that range to $23 to $25 due to strong demand. Reports on Wednesday indicated it could price as high as $28.
The company is set to debut on Thursday on NYSE Euronext's (NYX) New York Stock Exchange under the ticker symbol “TWTR.”
Screaming Buy or Sign of a Bubble?
Twitter, which allows its 230 million active users to post 140-character messages, has become a valuable tool for celebrities, advertisers, journalists and even investors. Today, more than 500 million tweets are shared on the service each day.
“Just as Google, Amazon and Facebook have become Internet Utilities, so too may Twitter,” Mark Mahaney, an analyst at Royal Bank of Canada’s (RY) RBC Capital Market, wrote in an upbeat research note on Wednesday. “We think that current valuation does not fully reflect Twitter’s enormous opportunity.”
Mahaney kicked off coverage on Twitter with a $33 price target and an “outperform” rating.
Others believe the aggressive valuations by Wall Street analysts is overdone and reminiscent of the tech IPOs of 15 years ago that lacked revenue and proven business models.
“We are back at the dotcom days,” Vivek Wadhwa, a fellow at Stanford University, told FOX Business.
“Twitter is a good company but nothing like these ridiculous predictions we’re hearing about… These analysts are smoking something,” said Wadhwa, who earlier this year was named to Time’s list of top 40 most influential minds in tech.”
Twitter vs. Facebook
Twitter is easily the most highly anticipated IPO since Facebook (FB) went public in May 2012. But it’s clear Facebook was much more mature and aggressive in its IPO, which ultimately cratered in value and cast a shadow over the IPO market.
While Twitter is raising as much as $2.1 billion, Facebook raised $18.4 billion, which made it the second-biggest U.S. IPO ever behind Visa’s (V) 2008 offering of $19.65 billion.
Facebook also garnered a hefty market value of $104 billion at its debut, the largest ever for a U.S. company at the time of an IPO.
At $26 a share, which implies a stock-market valuation of about $14.44 billion, Twitter is valued at 12.8 times its 2014 estimated sales. By comparison, Facebook was valued at 11.4 times year-ahead revenue.
The strong investor demand for Twitter’s shares comes despite the fact that the micro-blogging company is not expected to post a profit until 2015 or even 2016.
In fact, regulatory filings reveal its losses have been accelerating, with the company logging a net loss of $133.85 million during the first three quarters of 2013, compared with a loss of $70.69 million the year before.
Twitter generated $316.93 million in revenue in 2012, up a whopping 198% from the year before. Revenue growth is expected to slow to 101% for 2013 and then 76% in 2014.
While revenue growth is slowing, Twitter’s expenses more than doubled to $548.37 million during the first three quarters of 2013.
Analysts at underwriting banks like Goldman Sachs (GS) and JPMorgan Chase (JPM) are less bullish on Twitter's growth prospects than analysts who haven't had as close proximity to the company's executives, according to The Wall Street Journal.
Licensing Fees to 'Explode'
Some questions have also been raised about the efficacy of Twitter’s advertising platform, especially compared with search advertising or Facebook (FB).
Yet Twitter has seemingly picked an optimal time to go public, with the Federal Reserve’s super easy monetary stance forcing investors to aggressively search for returns. The Dow Industrials landed at a record high on Wednesday, their 33rd record close this year alone.
“I think it’s a fair value for the company,” said David Menlow, a veteran of IPOs who serves as president of IPOFinancial.com. “Licensing fees are going to explode as people realize Twitter is instantaneously in touch with what’s going on. The value proposition for advertisers is unsurpassed.”
Analysts said Twitter was smart to offer a relatively small float of 70 million shares of common stock, which could help pump up demand. The underwriters also have a 30-day option to buy an additional 10.5 million shares.
Investment banks scrambled for the chance to bring Twitter public. The underwriters on the offering were Goldman Sachs, Morgan Stanley (MS), JPMorgan, Bank of America Merrill Lynch (BAC) and Deutsche Bank (DB).