Twitter Inc could face volatile trade in its debut Thursday on the New York Stock Exchange, analysts said, but they remained enthusiastic after the money-losing social media company priced its IPO above the expected range.
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The microblogging network priced 70 million shares at $26 on Wednesday evening, above the targeted range of $23 to $25, which had been raised once before. The IPO values Twitter at $14.1 billion, with the potential to reach $14.4 billion if underwriters exercise an over-allotment option.
If the full overallotment is exercised, as expected, Twitter could raise $2.1 billion, making it the second largest Internet offering in the U.S. behind Facebook's $16 billion IPO last year and ahead of Google Inc's 2004 IPO, according to Thomson Reuters data.
The focus now turns to the first day of trading, with some analysts expecting a small price pop. Even with the share price increase, Twitter has approached its offering more cautiously than Facebook, which raised both the price and the number of shares offered before its IPO only to see the price fall substantially at the outset.
Twelve-month price targets on Twitter's stock range from $29 to $54.
Brian Wieser, an analyst at Pivotal Research Group who valued Twitter this week at $29 a share, said the stock appears to have strong institutional investor support and could easily close over $30 a share on its first day.
But he warned that trading could be volatile, given that Wall Street has struggled to value an unorthodox social media company with a newfangled business model.
"There's still so much uncertainty and it's so difficult to even identify how big the opportunity is," Wieser said. "Twitter will make Netflix look like General Electric as a bellwether of stability."
Twitter boasts 230 million global users, including heads of state and celebrities, but it lost $65 million in its most recent quarter and questions remain about long-term prospects.
It also lacks the ubiquity of Facebook or the "stickiness" factor that keeps people checking the No. 1 social network on a daily basis. A Reuters-Ipsos poll last month showed that 36 percent of people who signed up for a Twitter account say they do not use it.
Moshe Cohen, a professor at Columbia Business School in New York, said pressure on the company could quickly mount if shares lose steam out of the gate.
"Twitter, as a company with no expectations of making profits for several years, needs its investors to have faith," Cohen said. "If that stock starts to show some negative momentum from the beginning, it could last for a while."
Twitter, however, is listing amid the strongest market for U.S. IPOs since 2007, with equity markets soaring and uncertainty around the U.S. debt ceiling subsiding at least temporarily.
A number of recent IPOs have doubled on their first day of trading, including Container Store Group, restaurant chain Potbelly Corp and software company Benefitfocus Inc.
Twitter hiked its target IPO price on Monday from an initial range of $17 to $20. All of the proceeds from the IPO will go directly to the company, with no insider selling taking place.
Two sources said Twitter's underwriters will allocate roughly 20 percent of the offered shares to retail investors, while the vast majority of the remaining shares will go to large, "long-only" funds.
Goldman Sachs Group Inc, which beat arch-rival Morgan Stanley in gaining the lead position on the Twitter IPO, tops the list of U.S. technology bookrunners this year with an 18.3 percent market share, up from 11 percent a year ago when it ranked fifth, according to Thomson Reuters data.
Morgan Stanley and JPMorgan Chase & Co (NYSE:JPM) also led the IPO.
AVOIDING FACEBOOK'S MISTAKES
Twitter has focused on avoiding many of the pitfalls that plagued Facebook during its $16 billion IPO last May. The company priced shares more conservatively than Facebook did and listed on the New York Stock Exchange rather than the Nasdaq.
Trading glitches and the increase in both the price and number of shares in the Facebook offering contributed to a sustained decline from the $38 IPO price, with the shares taking more than a year to recover.
The high level of interest stoked by Twitter's road show spurred speculation in recent days that its bankers could raise the price again significantly higher than $25, but they ultimately did not.
"I'm glad they didn't take it up higher, as speculated," said Suntrust Robinson Humphries analyst Robert Peck. "It still provides enough upside for investors and provides a nice contrast to Facebook."
Despite Twitter's massive valuation, some analysts have expressed concerns about whether it can sustain user growth and continue to ramp up advertising sales at a rapid clip.
Twitter, which has extensively courted large brands, still generates relatively little revenue per user compared with Facebook, while the majority of its users are located outside the United States in countries such as Indonesia or Brazil, which are less lucrative digital advertising markets.
During its road show over the past week, Twitter executives assured investors that the company could wring more money out of international users and smaller businesses by opening offices abroad and expanding its self-serve advertising products.
"Twitter has clear similarities to Google, Facebook and LinkedIn, but we would argue that Twitter exceeds these alternatives on the basis of its branded ad potential," Evercore Partners analysts said in a note, as they initiated coverage with an "overweight" rating and a price target of $43.
"The distinction in how Twitter charges advertisers stands to deliver higher than expected ad revenues and ARPU in the years to come."
Analysts, however, say the company could encounter a slew of regulatory and policy hurdles in foreign countries as it expands.
Twitter said last month that its third-quarter revenue more than doubled to $168.6 million, but its net loss widened to $64.6 million from $21.6 million a year earlier as costs ballooned.
Twitter's expenditures will likely continue to rise as it expands its international presence and continues to invest in infrastructure and acquisitions.
Twitter's well-known intellectual property vulnerabilities could also force the company to invest heavily to expand its patent portfolio, as Facebook has done since going public.
Twitter disclosed Monday that it had received a letter from International Business Machines Corp accusing the social media company of infringing on at least three U.S. patents.
Twitter is set to trade on the New York Stock Exchange on under the ticker TWTR.