OLD Media Moves

Coverage of Twitter’s debut

November 8, 2013

Posted by Liz Hester

The much-hyped initial public offering for Twitter is finished now that shares priced and made a lot of people rich on the first day of trading.

Let’s take a look at a small portion of the extensive coverage of the site’s first day as a public company.

Here are the basic facts from the Wall Street Journal’s Money Beat blog:

Twitter‘s highly anticipated trading debut was a success.

The social-messaging platform opened at $45.10 on the New York Stock Exchange Thursday morning, up 73% from the $26 initial public offering price. Twitter sports the biggest U.S. technology IPO since Facebook Inc. went public 18 months ago.

Twitter’s IPO comes at a time when the broader market has been doing quite well. The S&P 500 has risen in 16 of the past 21 trading days. It is up 8% over the past two months and has risen 24% this year.

Twitter shares finished at $44.90, up 73% for the day.

The Heard on the Street column had a great story about Twitter’s valuation and how to look through all the options, warrants and other shares to figure it out:

After pricing late Wednesday at $26, shares of newly public Twitter opened at $45.10 Thursday. According to most financial databases, that means the micromessaging service has a market value of $25 billion. That is open to debate.

Twitter’s initial public offering, like Facebook‘s FB -3.18% before it, provides a window into why it is crucial for investors to focus on diluted share counts and stock-based compensation when valuing highflying social media and tech companies. Failing to do so can lead investors to pay far more than they realize for a stock, a particularly big risk in Twitter’s case given its heady valuation.

Twitter’s $25 billion market-value figure is based on 555 million shares outstanding—the headline number in Twitter’s IPO filing. But such basic share counts don’t take into account options, warrants and restricted stock. Altogether, Twitter has 150 million such shares, according to its IPO filing, bringing its total share count to 705 million.

Another adjustment is necessary for options and warrants. When those are exercised, Twitter will receive cash equal to the number of options multiplied by their weighted average exercise price. For the purpose of analysis, investors typically assume a company will reinvest the combined proceeds into buying back shares. That lowers Twitter’s diluted share count slightly to 704 million.

But that boosts its market value to $31.7 billion—or $6 billion more than its capitalization based on a basic share count. This only intensifies the pressure on Twitter to demonstrate that it can bring its revenue in line with its lofty valuation, while emphasizing how frothy the share price is following its first-day gain of more than 70% above the listing price.

The New York Times had a great story about Twitter learning from the mistakes of Facebook and the differences in the offerings, which weren’t trivial:

Twitter’s public debut is turning out to be the yin to Facebook’s yang.

The initial public offering of Mark Zuckerberg’s social network in 2012 was blowout, capitalistic excess. Twitter has carefully managed expectations. But both are a curious mix of cynicism and belief – redistributed among bankers, backers, executives and prospective investors. Still, when it comes to hyped-up I.P.O.’s, everyone seems most comfortable reacting to recent history.

Facebook’s float was an exercise in insiders extracting as much as possible, while surrendering little. Lead underwriter Morgan Stanley priced the stock at an overly generous multiple, and then raised the price and shares sold as mania sucked in the credulous.

Insiders dumped stock – most of the money raised went to them – because uncertainty surrounded the company’s business model. Growth was falling, and mobile posed a threat. Mr. Zuckerberg seemed to care more about his wedding the following day. Super-voting stock meant he could ignore stockholders. The stock’s open on Nasdaq was flubbed, and it quickly lost half its value.

Twitter’s float has been more finely tuned to rewarding new buyers – delaying future wealth removal by insiders. Backers are not selling any stock, so all the money raised furthers Twitter’s ambitions. There’s only one class of stock. Growth is accelerating, and mobile devices’ growth is wind at Twitter’s back.

So Twitter shareholders were the ones profiting today, not insiders, which is an interesting gamble, but likely bought them a lot of good will with investors. The Bloomberg story had a good section talking about money managers urging people to sell today, indicating the market may be overvaluing the company:

The pricing puts the onus on Twitter to deliver on its promises of fast growth after earlier pitching shares as low as $17. Chief Executive Officer Dick Costolo has rallied investor interest in Twitter’s rapid sales curve — with revenue more than doubling annually — even with no clear path to making a profit.

The company received orders for about 30 times as many shares as it offered at the $26 IPO price, a person with knowledge of the matter said. About 8 million of the shares, or 11 percent of the total in the IPO, were allocated to retail investors, the person said, asking not to be identified because the information is private. A typical retail allocation is 10 percent to 15 percent.

Still, any price over $40 reflects “hype” and makes Twitter too risky of an investment, said Jeffrey Sica, president and chief investment officer of Sica Wealth Management LLC in Morristown, New Jersey.

 “I anticipated a very strong open, but when you start to approach these levels this is absolute froth,” he said. “There is nothing supporting this range. I think this is just way, way above what realistically we should be considering a stable open.”

Brian Wieser, an analyst at Pivotal Research Group in New York, downgraded Twitter to a sell rating with a $30 price target.

“If you’ve got it, sell it,” Wieser said in an interview. “If there are willing buyers who have a view of the business today that gets them comfortable with this valuation then those people should hold it, but I can’t get there, and I’m not recommending my clients to hold it.”

While IPOs might be returning to 2007 levels of valuation, hype and investor interest, it does make sense to keep in mind that it won’t last. Twitter seems to be benefiting from watching Facebook as well as incredible market timing. Either way, a more than 70 percent return on an investment is pretty incredible for one day.

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