With social media site Twitter set to float on the New York Stock Exchange on Thursday (7 November), Roy Topol, investment manager at Investec Wealth & Investment, weighs up the merits of its potential success.
Twitter is pricing its IPO at $26 and is expected to raise $1.82 billion by selling 70 million shares, giving it a market cap of $14.2 billion.
According to Topol, Twitter’s IPO is arguably the most interesting of the year and most exciting IT listing since Facebook last year.
Topol believes that Twitter would have taken notes from Facebook’s IPO flop.
“It was one of the few high profile listings where the share traded below its IPO price a couple of days after listing (it stayed below its listing price for over a year),” Topol said.
The analyst noted that, with the issues that Facebook shareholders had to endure during its IPO, it seemingly encouraged Twitter to steer clear of the Nasdaq – synonymous with technology companies – rather opting to list on the New York Stock Exchange.
Twitter also appointed Goldman Sachs as the underwriters and lead book builders for the listing.
“Many in the investment community blame Morgan Stanley, the underwriters and lead book builders for the Facebook IPO, for hyping up the IPO price a couple of times before listing (due to the rampant demand) which left very little on the table for others,” Topol said.
Internet companies by amount raised in IPO:
Internet companies by market value on listing, including overallotments:
Source: Dealogic, Wall Street Journal
When it comes to valuation, Topol believes that Twitter does look rather expensive – it is listing on around 20 times revenue (and 10 times forward revenue) with no history of profit in its short seven year history.
“Even if you forecast profits to be $500 million in two years’ time, it is still a rather steamy 20 times its two year forward earnings.”
A growth story
However, the analyst notes that the power of Twitter and its growth has been staggering. At the end of September it had almost 232 million active users who generate over 500 million tweets a day. This is up from 30 million users in March 2010.
“The revenue growth has been even more staggering – from a revenue base of $28 million in 2010, it generated revenue of $422 million for the nine months to end September 2013.
“Some analysts have forecast revenue to top $1 billion for the full year next year, as it starts to monetise its platform through various advertising campaigns,” Topol said.
The analyst added that Twitter is probably still in the infancy stage of its growth story.
He said that, while it is extremely difficult to forecast a sustainable growth rate, the one thing Twitter does have on its side is a business model that is it is scalable – the infrastructure that Twitter is built on does not require massive capital to grow.
“Revenue is almost all sourced from advertising and if revenue can grow at 30% per annum for a number of years and it can contain costs, Twitter could be a very profitable company. Furthermore, while Twitter does seem expensive in absolute terms, relative to other social media companies it does look attractive.”
Looking at the sustainability of Twitter’s business model, it also looks more attractive than some of its peers, according to Investec Wealth & Investment.
“It is unique in its ability to disseminate information quickly and is used extensively as a valuable medium of communication. This core focus and specialisation differentiates it from many other social media companies, which should increase its attraction as an investment,” Topol said.