Twitter Should Avoid Facebook's IPO Pitfalls
Twitter's IPO application will become the largest tech company listing since Facebook's debut in May last year, and this microblogging service site must avoid repeating the long-term poor stock performance that followed Facebook's public offering.
On Thursday, Twitter announced via a tweet that it had secretly submitted its IPO application to the U.S. Securities and Exchange Commission, but the company did not provide any other financial data or details about when the listing would occur.
Avoiding Previous Mistakes
According to regulations, Twitter will need to disclose its financial information to investors three weeks before initiating the roadshow process. Last year, Facebook's IPO was priced at 107 times its expected earnings per share for the next 12 months, a P/E ratio higher than 99% of the companies in the S&P 500 index. Therefore, Twitter may be striving to avoid repeating Facebook's mistakes. Facebook's $16 billion IPO saw its market value shrink by nearly half shortly after going public.
David Pakman, a partner at U.S. venture capital firm Venrock Inc., pointed out: "In terms of stock pricing expectations and the IPO execution process, Twitter will fully avoid repeating Facebook's IPO mistakes. Secretly submitting the IPO application might reduce the expected stock price, and also help Twitter adopt a different stock pricing strategy from Facebook."
According to an anonymous source familiar with the matter, Goldman Sachs will serve as the lead underwriter for Twitter's IPO. Morgan Stanley, Goldman's archrival, was the lead underwriter for Facebook's IPO.
Overcoming First-Year Syndrome
Twitter's ability to secretly submit its IPO application is entirely based on the provisions of the U.S. JOBS Act. This law stipulates that companies with annual operating revenues below $1 billion enjoy up to five years of an 'incubation period.' During this time, eligible companies do not have to make any financial disclosures or submit audit reports to regulators, reducing costs and red tape to enable small businesses to go public more quickly and easily.
Jim Prosser, a spokesperson for Twitter, declined to comment on the company's IPO strategy.
Last month, one of Twitter's investors, GSV Capital Corp., valued the company at $10.5 billion, a 5% increase from its valuation in May this year. Facebook's current market value is approximately $109 billion, with its stock price having fallen by as much as 53% last year, but this week Facebook's stock price just reached a new high since its IPO.
On September 11, Mark Zuckerberg, the head of Facebook, attended the TechCrunch Disrupt conference in Silicon Valley's internet industry and discussed some changes and feelings brought about by the IPO for himself and the company. He stated that in the first year after the IPO, he felt that Facebook was in extreme chaos. However, he also learned a lot from the process and said he shouldn't have been so worried about the challenges after the IPO.
Zuckerberg said: "After the terrifying first year, Facebook became stronger."
As of Thursday's close, in regular trading on the Nasdaq Stock Market, Facebook's stock price fell slightly by less than 1%, closing at $44.75 per share, bringing the company's cumulative stock price increase within the year to 68%.
More Growth Potential Than Facebook
Facebook conducted its IPO in February last year and disclosed its financial data to investors in advance. Every modification to its application afterward was subject to strict scrutiny, and later the content of the submitted IPO application indeed raised questions among investors about its mobile business revenue.
Twitter only needs to disclose its financial information to investors three weeks before initiating the roadshow process. Michael Pachter, an analyst at Los Angeles-based Wedbush Securities Inc., pointed out: "What Twitter does is completely in compliance with regulations and avoids public scrutiny."
Founded in 2006, Twitter did not launch advertising services until 2010. Compared to Facebook's IPO timing, Twitter is at an earlier stage of its own growth. In the year before its 2012 IPO, Facebook's annual revenue approached $4 billion, while Twitter's goal for annual revenue by 2014 is merely $1 billion. This means that Twitter has greater growth potential after its IPO.
Potential Investment Target
David Pakman of Venrock Inc. said: "Compared to Facebook, Twitter is clearly in a very different phase of its own growth cycle when it goes public. I think Twitter's choice of timing largely depends on which stage of its core business model maturity it is in."
According to estimates by authoritative market research firm eMarketer, Twitter's annual advertising revenue will reach $950 million in 2014, growing 63% from this year's $582.8 million, and was only $139.5 million in 2011. Additionally, eMarketer expects that the proportion of mobile device advertising revenue in Twitter's total revenue for the whole year should exceed 50%.
In a research report written on Thursday, Brian Wieser, an analyst at investment firm Pivotal Research Group, pointed out: "Twitter will position itself as a leader with growth potential in the mobile advertising market."
Twitter has already successfully attracted investors. For those investors seeking opportunities outside of Facebook and LinkedIn, the two major social networking sites, Twitter will be a very popular investment choice.
Bruno del Ama, CEO of Global X Funds, an investment fund company, pointed out: "Twitter is currently the only unlisted social network company in the market. If a company like Twitter can become our potential investment target, it would be something we would be very happy about."