The microblogging service finally reveals what it thinks it is worth
By M.G.| SAN FRANCISCO
THE wait is almost over. On October 24th Twitter announced a proposed price range of $17 to $20 a share for its much-ballyhooed initial public offering on the New York Stock Exchange, which looks set to take place in early November. If the company were to go public at the top end of its range, this would imply a valuation of around $11 billion for Twitter and would raise around $1.6 billion for the firm and its current owners. Twitter’s executives will now embark on a roadshow to convince investors that the microblogging firm’s shares are worth snapping up.
One of their goals will be to ensure that the firm’s share price rises sharply, or “pops” in bankers’ jargon, in early trading, so that Twitter doesn't go down the same road as Facebook's IPO. The giant social network was pilloried for overpricing its shares at the time of its flotation in May 2012: its share price duly plummeted and it took more than a year for it to rise back above the $38 at which it began trading.
Can Twitter, which now handles some 500m tweets a day, avoid a similar fate? Many commentators have noted that even at $20 the firm’s shares would still cost less than the $20.62 that Twitter concluded they were worth during an internal valuation exercise in August. But rather than jump to the conclusion that this automatically makes Twitter a bargain, smart investors will want to probe various aspects of its business during the forthcoming roadshow.
One important question they will want Twitter to address is how fast it thinks it can expand the Twittersphere. The firm saw its audience grow by 40% in the nine months to the end of September and it now stands at 230m monthly active users. That is an impressive number. But in the same period of 2012 Twitter increased its user base by almost two-thirds, so the growth rate is slowing. Some sceptics have suggested that Twitter lacks the mass appeal of a Facebook and will therefore struggle to become a mainstream phenomenon.
Investors will also want a clearer picture of how profitable Twitter is likely to be in the future. Unlike Facebook, which was making money when it went public, Twitter is still bleeding red ink. It lost $134m in the first nine months of this year, compared with a loss of $71m in the same period of 2012. The six year-old firm says it is still in expansion mode and that as it matures it expects to start pumping out profits. But much will depend on how successful it is at developing new ad formats that allow it to capture more of the $118 billion spent each year on digital advertising around the world.
That may not worry punters keen to take a flutter on Twitter. Its fans point out that the firm’s prominent founders, who include Jack Dorsey and Evan Williams, are planning to hang on to most of their shares in the company, which is a vote of confidence in its prospects. And they note that other social-media outfits are hot right now. Pinterest, a start-up that allows people to post images and videos to online scrapbooks, recently raised $225m in a private financing round that valued it at a whopping $3.8 billion. Twitter’s owners will be counting on such enthusiasm to help make it top of the internet pops.
