Twitter: day two and beyond
While Twitter recorded a strong performance in its debut on the New York Stock Exchange on Thursday (8 November), for investors it marks “the beginning of nerve-racking journey of whether Twitter can deliver on the huge expectations”.
This is according to Peter Garnry, equity strategist at Saxo Bank. “Twitter’s IPO brings to mind Julius Caesar’s alleged description of his campaign in Britain: veni, vidi, vici, or I came, I saw, I conquered,” he said.
The stock closed its first day of trade on the New York Stock Exchange at $44.90 a share after hitting a session-high of $50, nearly double the initial public offering price of $26 set late on Wednesday.
Garnry noted that the initial price range was set to US$17-20 per share, which translated into a very fair valuation given the current outlook. Three days before the IPO date the price range was raised to US$23-25, before being raised again to a final price of US$26 amid continuing demand.
“It has since emerged that Twitter insisted that the share price did not exceed US$26 to avoid a situation similar to the Facebook IPO when the price was inflated considerably,” Garnry said.
He pointed out that Twitter’s management insisted on a low proportion of retail investors in favour of more long-term institutional investors. “From what we have heard, a group of large institutional investors have bought almost 50% of the issued shares which is beneficial for Twitter as a broad and long-term investor base is ideal for a public company.”
Saxo Bank noted that following a day of wild fluctuations for Twitters’ shares on the NYSE, it settled at US$45 in a complete replay of Facebook’s first day of trading, which also ended the day at exactly the opening price.
“If the Facebook deja vu continues, Twitter may very likely see renewed pressure on the share price. Facebook lost 11% on the second trading day,” Garnry said.
Based on the opening price of US$45 per share, Twitter is valued at EV/Sales of 21.7. “This is twice the valuation of Facebook which is already priced aggressively. The key message to investors is that this forward valuation means that the downside risk is significant in the case that Twitter does not meet expectations at the next earnings release,” the analyst said.
Saxo Bank warned that if Facebook’s life as a publicly traded company is any guidance, Twitter will find it difficult to satisfy investors’ expectations in its first year as a public company.
“The combination of restricted shares coming to market next year, outstanding preferred shares, and numerous stock options means that the supply pressure will likely exceed the demand side of the equation, and as a result the share price is likely to be weak over the coming year.
“That said, the share price and the company’s fundamentals can often live in two different worlds. So while the share price can be under pressure for a year, the underlying fundamentals of the company can easily strengthen, which was obviously the case for Facebook since its IPO last year,” Garnry said.
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