Home' Trinidad and Tobago Guardian : November 7th 2013 Contents BG28 | THE ECONOMIST
BUSINESS GUARDIAN www.guardian.co.tt NOVEMBER 2013 • WEEK ONE
Twitter already is a social-media star. Now it
hopes to become the toast of the stock market
too. The firm has gradually been unveiling more
information about its business. However, as it
gets ready for its first day of trading as a public
company on the New York Stock Exchange, which looks likely
to be on November 7, opinions about a fair price for the shares
The firm has announced a provisional range of between
$17 and $20 for its stock, which would value it at as much
as US$11.1 billion. Speculation is rife that Twitter and its
bankers could set an even loftier price before trading starts,
though as this article went to press no change had been
announced. If they do push the price higher, long-term
investors could get their fingers burned.
Twitbulls point out that Twitter is going public at a time
when social-media stocks are all the rage. On October 30
Facebook s share price, which already had risen by 84 per
cent this year, soared in after-hours trading following news
that its latest quarterly revenue had hit US$2 billion. Linkedin
has seen its stellar revenue growth slow a bit recently, but
its shares are still up 95 per cent this year.
Twitter s boosters also claim that the company deliberately
set a conservative initial price range to fuel investor interest
in its stock, noting that an August internal valuation conducted
by the firm reckoned its shares were worth US$20.62 each
at the time. The company has continued to increase its audi-
ence, and now boasts 232 million users that visit it at least
once a month.
Small wonder, then, that some financial folk are predicting
that Twitter s stock will fly even if the IPO price is a bit higher
than the existing range. Brian Wieser of Pivotal Research
Group reckons that its shares will be changing hands at US$29
by the end of the year.
Others are even more optimistic. Doug Kass of Seabreeze
Partners Management, a hedge fund, has said that he thinks
the share price of Twitter could double within its first month
of trading and that he would be willing to pay as much as
US$32.50 for its shares. Twitbulls like to point out that Twitter
is currently generating about US$2.30 of revenue per user.
That is much less than Facebook makes from its audience,
implying that Twitter has plenty of room to boost sales.
They gloss over an important fact, however. Unlike Facebook
and Linkedin, which were making healthy profits before they
went public, Twitter is still losing money -- US$134 million
in the first nine months of this year, compared with US$71
million in the same period of 2012. These losses make it
impossible to compare Twitter s IPO with others using the
traditional yardstick of a price-earnings ratio.
Instead analysts often look at another measure: the ratio
of a firm s proposed market capitalisation at IPO to the past
12 months sales. Jay Ritter, a professor at the University of
Florida in Gainesville, has calculated this ratio for Twitter
using a share price of US$18.50, which is the mid-point of
its proposed range. Counting in restricted shares and those
associated with outstanding stock options, this produces a
market cap of US$12.9 billion and a price-to-sales ratio of
24.1 based on Twitter s revenues in the past 12 months. That
is the third-highest price-to-sales ratio of any IPO in America
since 1980 involving firms with significant revenues.
Shares in the two companies ahead of Twitter in the chart
-- Facebook and Palm, a now-defunct maker of hand-held
devices -- fell sharply in the months following their IPOs.
Ritter notes that the top 15 companies in his price-to-sales
ranking saw their share prices drop by an average of five per
cent in the six months after their first day of trading.
"A valuation at a high price-to-sales ratio removes a lot
of the upside potential for investors in the public market,"
The challenge faced by companies with high ratios is to
generate revenue fast enough to meet investors expectations.
So far Twitter has only a microscopic share of the US$118-
billion-a-year global market for online advertising. Still, the
fact that many people tweet on their smartphones means
that it is well-positioned to take advantage of growth in
mobile advertising. On the other hand the compact nature
of its tweets, limited to 140 characters, means that Twitter
will find it harder than Facebook to generate ad formats that
mint money. Besides, it now faces much stiffer competition
from the social network and other companies such as Google
in the mobile-ad arena.
So what is a fair value for Twitter s shares? Aswath
Damodaran, a professor at New York University, has built a
valuation model that assumes that Twitter will scoop up
around 5.5 per cent of the online-ad market by 2023, giving
it revenues of US$11.2 billion. His model also posits an oper-
ating margin of 25 per cent for the company, which seems
plausible, given that of other Internet firms that have grown
Based on his analysis, he reckons that Twitter s shares are
worth US$17.84 each, which is toward the lower end of Twit-
ter s current price range. Given the many uncertainties that
still dog the company s business model, a price of around
$18 a share seems reasonable.
Investors who like volatility may still want to take a flutter
on Twitter s stock, however, even if the price is somewhat
higher. Given all of the hype around the company, Twitter s
shares could spike upward immediately after its IPO, allowing
investors to mint money by buying and selling quickly.
In short, Twitter s flotation could be a great short-term
trading opportunity. At anything above US$18 each, however,
its shares will be a poor long-term investment.
@2013 Economist Newspaper Ltd. (Distributed by the New York
Is Twitter going cheep?
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