This week, institutional investors who participated in Twitter's Initial Public Offering (IPO) roadshow expressed optimism about the company's IPO, with little indication of a return to the irrational exuberance seen during Facebook's IPO last year.
About 600 investors joined Twitter CEO Dick Costolo for a luncheon in New York City on Wednesday, which was part of Twitter's IPO roadshow. This loss-making company is seeking to raise up to $1.6 billion through its IPO.
The IPO process of Twitter is closely watched by Wall Street and Silicon Valley. Unlike Facebookâs high-profile approach last year that raised $16 billion, Twitter has adopted a more conservative style during its roadshow. Additionally, Twitter chose to list on the New York Stock Exchange rather than the NASDAQ, which Facebook selected. A fund manager who attended Twitter's roadshow on Monday said, "Although there is similar excitement, Twitter's approach is completely different from Facebook's last year. Facebook's approach now appears very foolish."
Twitter announced last week that the offering price range for its IPO would be between $17 and $20 per share, valuing the company at a maximum of $11 billion. This valuation is less than the $15 billion expected by market analysts, and far below the $100 billion valuation Facebook received during its IPO in May of the previous year. However, at the time of Facebook's IPO, the company had an annual profit of $1 billion and revenue of $3.7 billion. Twitter has yet to turn a profit; its revenue in 2012 was only $316.9 million, with a net loss of $79.4 million.
Twitter's Valuation
At a $20 offering price, Twitter's valuation represents 20 times its current 12-month revenue; at $17, it represents 17 times its current 12-month revenue. However, as everyone exercises stock options and restricted shares worth tens of millions of dollars, Twitter's valuation will quickly inflate. Last year, when Facebook went public, its valuation was 24 times its future 12-month revenue; LinkedIn, when it went public in 2011, had a valuation of approximately 30 times its future 12-month revenue.
Fund managers believe that Twitter's current offering price is relatively conservative. Based on their initial judgment, Twitter's offering price range could be between $28 and $30 per share. In September, Twitter mentioned that its internal stock valuation was $20.62 per share.
A lower valuation can attract investors who expect Twitter's stock price to rise after listing. According to the plan, Twitter's stock will begin trading on the NYSE on November 7th. Scott Sweet, CEO of IPO Boutique, an investor advisory firm, said, "Twitter is receiving enthusiastic welcome from investors. Both institutional and retail investors I've spoken with have indicated they will participate in Twitter's IPO."
Facebook's high-profile approach caused its stock price to plummet by 11% on the second day of trading after its IPO. In the following months, due to investor concerns about Facebook's inability to make progress in mobile business, the company's stock price continued to decline. Before Facebook's IPO, the underwriters increased the offering volume by 25% and raised the offering price. Eventually, technical issues with the NASDAQ delayed Facebook's stock trading, angering investors. It took Facebook over a year to bring its stock price back above the IPO price.
Some investors say they believe that Twitter's management has learned from Facebook's experiences and lessons, thus being more conservative in determining the offering price. As the roadshow continues, it is expected that investors' interest in Twitter will continue to grow. After completing roadshows in Boston, Chicago, San Francisco, Los Angeles, and Denver, Twitter's roadshow will conclude in New York next week. Twitter is expected to set its IPO price on November 6th and begin trading on the NYSE the following trading day, with the stock ticker symbol "TWTR".