Strong demand for Twitter stock led the company to raise its stock-offering price yesterday. Shares had originally been priced with a range of $17 – $20. But the final price of $26 per share means that the investment bankers thought they could get a premium for the stock.
Twitter is selling 70 million to 80 million shares. If the IPO were fully subscribed, the company would raise a total of $2 billion. That sounds like a lot of money. But compared with the Facebook (NASDAQ: FB) IPO that raised $16 billion, this is a relatively small offering. And after the IPO, Twitter is about 75% smaller than Facebook.
Despite the fact that Twitter is unprofitable, investors are exited about the stock for three reasons.
First, unlike Facebook or LinkedIn (NASDAQ: LNKD), Twitter is still in its infancy and growing its revenues rapidly. In the third quarter of this year, revenues soared 104% to $167 million.
Second, Twitter is losing money today – to the tune of $134 million in the first nine months of the year. Normally I would highlight this as a real negative. But the fact is that Twitter will be turn a profit within the next couple years, and that event could be a huge catalyst for the stock.
Third, the company’s quarterly revenue per user is low at $0.73. That’s about 60% below Facebook. It’s likely that this revenue per user will grow as Twitter innovates its business model.
As with every stock, what matters most is the valuation. After all, at the right price, even poorly operated and money-losing companies can be a good investment.
Twitter IPO: Looking Ahead
The few analysts who follow Twitter are projecting 2015 revenues of around $2 billion. That would be a huge increase from the $500 million in expected sales this year.
One way to value Twitter is to compare the stock’s valuation to social networks including Facebook and LinkedIn. These companies trade at a valuation of 10-times 2015 revenue estimates.
Assuming Twitter should be valued similarly, I arrive at a market value of about $20 billion. And that translates into a price per share of about $28 – $30, depending upon the exact size of the stock offering.
Given Twitter’s rapid growth and small size, the company’s stock could command a premium to the lofty valuation of its social media peers.
But with the Twitter IPO opening at around $45 per share, Twitter’s market capitalization is around $32 billion (on a fully diluted basis). That puts the valuation at about 16-times 2015 revenue estimates. At a 60% premium to other social networks, that seems especially rich.
Some Wall Street analysts are jazzed up about the Twitter IPO. They include Robert Peck of SunTrust with a $50 share price target, and Victor Anthony of Topeka Capital Markets with a $54 target.
I would personally buy shares of Twitter around $30. It doesn’t look like the stock will trade at that price today. And for that reason, I’ll be steering clear of Twitter stock despite the IPO hype.
With other social media stocks, investors have had better buying opportunities after the IPO. If Twitter stock ever trades at an attractive valuation, I’ll consider buying it in my personal account. Until then, I’ll stay on the sidelines and enjoy reading the headlines.
The One Stock to Own in 2014 — The Year Mobile Takes Over
On Dec. 31, something incredible happened. For the first time in history, the majority of Internet traffic originated from NOT from PCs or desktops — but from mobile devices including smartphones and tablets. We’re never going back. Mobile is taking over. And even though the biggest player in mobile, Apple, is selling over 200 million iPhones this year alone… here at Wyatt Research, we’re recommending the one company no one is taking about. The one reaping massive profits each time a new Apple or Samsung smartphone is activated. In fact, as mobile data usage explodes in the year ahead, its stock is set to soar! Shares are already on the move. So, before this stock moves any higher, read our latest report for all the details: Click here for the full story.