Twitter shares launched without incident Thursday, skirting the troubles that plagued rival Facebook in its debut last year and delivering the kind of hefty "pop" that investors in initial public offerings covet.
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"Phew!" tweeted Anthony Noto, the lead banker on the deal from Goldman Sachs moments after shares started trading.
Those five characters summed up the sentiment among those involved in the market debut of the 140-character messaging service, the second-biggest U.S.-listed Internet offering ever after Facebook.
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Shares opened at $45.10 on the New York Stock Exchange, up 73% from the $26 IPO price set Wednesday evening. After a bit of a churn up, then down, the excitement quickly petered out. Shares spent much of the day hovering around $46 before closing below the opening price, at $44.90.
Christopher Baggini, senior portfolio manager at Turner Investments, a Berwyn, Pa., firm managing about $9 billion in assets that bought shares at the IPO price, said.
"They wanted this deal to work. They didn't want it to be in the penalty box like Facebook was for six months."
The San Francisco-based company raised as much as $2.1 billion and ended the day with a market capitalization of about $25 billion. That made the six-year-old company bigger than more than half of the firms in the S&P 500 and larger than well-known brands such as Kellogg Co. and Whole Foods.
(L-R) Twitter CEO Dick Costolo, Twitter cofounder Jack Dorsey, Twitter cofounder Evan Williams, and Twitter cofounder Biz Stone applaud as Twitter rings the opening bell at the NYSE. (Click Image To Enlarge)
The share price rise made Chairman Jack Dorsey a billionaire on paper. Chief Executive Dick Costolo's stake was worth $345 million by day's end. At Twitter's headquarters, its employees—some newly minted millionaires and many wearing T-shirts adorned with the company's bluebird logo—were feted with an overflowing doughnut tower and a lunchtime tasting menu featuring a grilled rack of lamb and fritters made of macaroni and cheese and roasted duck.
Fittingly, much of the merrymaking played out on Twitter with employees tweeting about co-workers who were tracking the stock.
Twitter has distributed nearly 86 million restricted stock units to its 2,300 employees. At Thursday's closing price, those units have a total value of $3.86 billion, or an average of $1.68 million per employee.
But the stock isn't divided evenly among employees. And they must hold the stock for at least one year before they can sell even one-quarter of it. The stock issued this year—more than half the total—can't be sold until August 2014.
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The outcome was a win for Goldman Sachs, which missed out on leading Facebook's megadeal to rival Morgan Stanley last year. And it looked good for the NYSE, which has pushed to sweep up more technology listings after the Nasdaq Stock MarketNDAQ bungled last year's Facebook debut. Facebook's offering was marred by a technology glitch and shares struggled for months, after a deal that critics say was too big and too expensive.
Morgan Stanley and J.P. Morgan & Co. led the Twitter deal along with Goldman.
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Twitter's offering wasn't a success for everyone. Because the stock gravitated little from its opening price—at one point cracking $50 before quickly declining—investors who didn't have an inside track to the $26 price and who bought Thursday hoping for a quick rise had little opportunity to sell. And some felt priced out in the $40s.
Nick Martinez, a Bronx-based investor who said he wouldn't pay more than $28, said.
"Buying this stock at $45 is like a child waiting to grow into his parents' clothes."
Untapped potential is what investors were paying for, as Twitter currently isn't profitable. At a share price of around $45, Twitter is "far and away" the most expensive stock in its peer group, valued at more than 20 times expected 2015 sales, said Mark Mahaney, Internet stocks analyst at RBC Capital Markets.
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That is nearly twice the level that user-generated reviews service Yelp trades at, and even further above where social networks LinkedIn and Facebook trade at, around nine times, according to RBC
Citing fast revenue growth, he said.
"I certainly think Twitter deserves the highest [valuation] in the space. But whether it deserves double…is a hard position to hold."
The 73% first-day gain from Twitter's IPO price is far from unprecedented. Six U.S.-listed companies have seen their shares more than double in trading debuts this year, most recently Container Store Group last week.
But among U.S. IPOs raising $500 million or more—the larger companies less prone to first-day rallies—Twitter's opening-day gain ranks the eighth-biggest on record, according to Dealogic.
Glenn Carell, a senior floor broker at Barclays, quarterbacked Twitter's debut on the NSYE floor, matching buy and sell orders and deciding when to open the stock, and at what price.
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About 30 minutes before the opening bell, Mr. Carell had in hand orders to buy some 18 million shares of Twitter stock, a sizable amount compared with the 80.5 million share offering.
At 9:45 a.m. Mr. Carell barked out an initial, estimated trading price range at between $40 and $44. Over the next hour, as he juggled buy and sell orders, demand from investors suggested Twitter shares could open as high as $47 apiece. Then the range being called out on the exchange floor began narrowing.
Just before 10:49, Mr. Carell yelled, "The book is frozen," and reached down and tapped the "DONE" button on his keyboard. That strike ended the stream of orders, fixed the opening "print" at $45.10, and Twitter became a public company.
About an hour later, Michelle Tandler got out of class at Harvard Business School and bought some shares at $45.69 through an E*Trade account.
Ms. Tandler, age 27, said she was drawn to Twitter because she is optimistic about companies that can "generate and capture tons of data," she said.
"I think it has a ton of potential still untapped."
Dan Greenshields, president of online brokerage Capital One ShareBuilder, said his firm saw triple the average daily new account openings on Thursday, with Twitter representing about 50% of all the firm's orders, primarily to buy shares.
The appetite for the shares suggests that Twitter "left money on the table" by not selling at a higher price. At $45 a share, the company theoretically could have raised $1.5 billion more for itself than it did at $26.
But the company and its advisers judged that the additional money wasn't worth what could have been sacrificed had they priced it higher, namely good will with long-term investors who they hope will buy more shares in future offerings, the people said. Also, unlike with Facebook, Twitter insiders didn't sell shares, relieving the pressure to price shares higher.
For Twitter's employees, the IPO marks a turning point even if some of them can't tap their newfound paper wealth anytime soon.
Utkarsh Srivastava, an engineer at the company, said.
"I remember waking up this early in the morning only for taking airplanes. Today it's for a rocket ship."
—Julie Steinberg, Matt Jarzemsky and Steven Russolillo contributed to this article.
COMMENTARY: To be totally honest, I was shocked when I heard that Twitter shares ended their first day of trading as a public company at $44.90, a pop of 73% above the IPO asking price of $26.00. But, by Friday, November 8, 2013, Twitter (NYSE:TWTR) shares ended trading at $41.65 -- down 3.25 or -7.24%. It is obvious that a lot of investors who bought shares on the IPO day, cashed out their shares and made their profit. Actually, 27 million+ shares exchanged hands on Friday, this is about a quarter of the number of shares (117 million) that exchanged hands on IPO day. Twitter shares were back up over $44.00 one week after the IPO.
Twitter's revenues for the twelve months ending September 30, 2013 were $452.1 million. Twitter's market capitalization at the end of trading on the IPO date was $24.457 billion. This means that Twitter's market cap is 54 times its gross revenues. Simply put, Twitter's shares are way over-valued when compared to other notable digital public companies:
- Facebook - Facebook's shares were worth $47.56 on November 7, 2013, for a total market capitalization of $116 billion or 16.88 times its gross revenues for the twelve months ending September 30, 2013.
- Google - Google's shares were worth $1,007.95 on November 7, 2013, for a total market capitalization of $331.816 billion or 5.782 times its gross revenues for the twelve months ending September 30, 2013.
- LinkedIn - LinkedIn's shares were worth $211.47 on November 7, 2013, for a total market capitalization of $23.7 billion or 17.11 times its gross revenues for the twelve months ending September 30, 2013.
- Yahoo - Yahoo's shares were worth $32.11 on November 7, 2013, for a total market capitalization of $32.43 billion or 6.81 times its gross revenues for the twelve months ending September 30, 2013.
For a startup that has yet to generate a dime in profits, investors are buying Twitter shares simply for its future potential and all the investor hype generated in the secondary market and Wall Street. If I were an investor I would be asking these questions about Twitter:
"What is that potential, exactly?"
"Does Twitter's stock price reflect any 'hidden' values that are not reflected by the market?"
"What is it about Twitter that truly stands out and cannot be replicated by competitors?"
"What is Twitter's strategy to develop a business model that can generate predictable and sustainable revenues over the longterm?"
If you have been following my blog posts, you know how I feel about digital technology firms that depend almost solely on an ad-supported revenue model like Facebook, Twitter, AOL and Yahoo. In a blog post dated March 20, 2011, I argued that Facebook's ad-supported revenue model has reached a critical inflection point as the number of users and advertising revenues slow. We are already seeing strong evidence that Facebook's user growth has flattened or stalled.
Facebook's ad revenues accelerated during 2013 due to the phenomenal growth in the number of monthly active users accessing their accounts via mobile devices (a factor I failed to take into account in my March 20, 2011 blog post), so it may appear that I am wrong in my assumptions, but rest assured, this is just a temporary condition. In their most recent Q3 2013 earnings report, Facebook's mobile ad revenues represented nearly half of total ad revenues. Facebook investors went crazy over this, but it cannot be sustained over the long-term, and the fact that Facebook's share price has been dropping for its high of $55 reflects this market uneasiness. The fact is this: Advertiser's are simply switching a portion of their ad budgets from desktop ads to mobile ads. Others are still standing on the sidelines, not sure how to deal with the new mobile advertising channel. This is a sort of "zero-sum" game that digital technology firms are exposed to if they rely too much on an ad-supported revenue model, and many of them may not be even aware of it.
Having said this, Twitter's management faces tremendous challenges easing Wall Street and Main Street investor concerns, that it can implement the right strategies to develop a sustainable business model that can generate sufficient and sustainable revenue growth to justify its huge price-to-revenues ratio of 54 times its gross revenues.
Twitter has been the subject of tremendous criticism by Wall Street and social media analysts about its business model and plagued with a relatively long list of issues that it must overcome and fix in order to grow revenues sufficiently to generate a profit and justify its huge price to revenues ratio.
- False or Spam Accounts - Back in April 2013 , Twitter's fake user population was estimated at 20 million accounts out of a total of 500 million. But Twitter spokesperson Jim Prosser also said at the time that 40% of Twitter accounts appear to be inactive because many people set up their accounts simply to "listen" to other people, rather than tweet themselves. In its IPO S-1 filing, Twitter acknowledged that, "The numbers of active users and timeline views are calculated using internal company data that has not been independently verified. While these numbers are based on what we believe to be reasonable calculations for the applicable period of measurement, there are inherent challenges in measuring usage and user engagement across our large user base around the world. For example, there are a number of false or spam accounts in existence on our platform. We currently estimate that false or spam acounts represent less than 5% of our MAUs. However, this estimate is based on an internal view of a sample of accounts and we apply significant judgement in making this determination. As such, our estimation of false or spam accounts may not accurately represent the number of such accounts, and the actual number of false or spam accounts could be higher than we have currently estimated. We are continually seeking to improve our ability to estimate the total number of spam accounts and eliminate them from the calculation of our active users, but we otherwise treat multiple accounts held by a single person or organization as multiple users for purposes of calculating our active users because we permit people and organizations to have more than one account. Additionally, some accounts used by organizations are used by many people within the organization. As such, the calculations of our active users may not accurately reflect the actual number of peole or organizations using our platform."
- 651 Million Users Have Abandoned Twitter - Twopcharts, a company that has been monitoring Twitter registrations for years, says that the total number of registered Twitter accounts is currently 883 million. That means 651 million accounts — about four times the number of active Twitter users — have been registered and then been abandoned by their owners. Those 651 million accounts are Twitter's "dark pool" of users: the people who signed up and didn't like it. Their accounts continue to exist, unused, according to Twopcharts. Twitter conveniently neglected to mention this problem in its S-1 IPO filing.
- Twitter's Growth Problem - In its S-1 IPO filing, Twitter reported more than 215 million monthly active users. At the bare minimum, that means that as of June 30, the company has added on average only 15 million monthly active users since the company hit more than 200 million late last year. Stack that up against Facebook’s 815 million monthly active users the company had at the time of its S-1 filing (As of September 30, 2013, Facebook reported it had 1.20 billion MAUs), and the message is clear: Twitter is big, but it’s no social behemoth.
- Twitter's "Mobile Gap" - Twitter isn’t supposed to have a mobile problem, since the company has been designed for phones from the start. Recall that in the company’s early days, it was built specifically for text messages. And last year, when Facebook was flailing at mobile, Twitter CEO Dick Costolo made a point of telling people he was making real money from phones. But it turns out that Twitter still has a mobile gap, just like everyone else: When people use Twitter on their phones, they generate less money for the company. Twitter doesn’t spell out the size of its mobile gap, but it does talk about it in its S-1 document. The big problem: Two of Twitter’s primary ad products — “Promoted Accounts” and “Promoted Trends” — don’t work very well on mobile phones because it’s hard for people to see them. So that means that Twitter has “generated higher advertising revenue per timeline view on our desktop applications than on our mobile applications,” the company said. And because 75 percent of Twitter users get to the service via a mobile device (at least some of the time), and because that number is likely to increase, the problem could become more acute: “To the extent that user engagement on mobile applications continues to increase faster than user engagement on our desktop applications, advertising revenue per timeline view may be adversely impacted even if total advertising revenue continues to increase.”
- Twitter Product Development Problems - The company hasn’t had a profitable quarter yet, but if it is going to find success as a public company, that will have to change. And one of the ways it will change is through the introduction of new products. Unfortunately though, this is one place where Twitter has a problem, according to Mike Isaac of All Things D. Isaac says the product culture is the opposite of that at Facebook, which moves quickly to roll out new products and features. He also says that this isn’t something new because it has been plaguing Twitter for many years now. Unfortunately, however, since Twitter is now a publicly traded company, it’s make it or break it time. Investors want to see new products that will rake in the dollars and bring in the new users. Without signs of growth toward profitability, Twitter itself will be in trouble.
- Twitter's Average Revenue Per User Is Terrible - For Q3 2013, Twitter’s average revenue per user ticked up to 72 cents, even though the average user checked their timeline 1% less frequently compared to the previous quarter. The reason is that the revenue Twitter earned for every 1,000 timeline views grew from 80 cents to 97 cents between the second and third quarters. Average revenue for the twelve months ending September 30, 2013 was only $1.95. This is dark contrast with Facebook's $8.43 average revenue per user during the same period. It is obvious that Twitter must find ways to increase MAUs and increase revenues from other sources besides advertising.
- Nielsen Twitter TV Ratings Could Be All Wrong - Recently, Nielsen and Twitter came up with another way for everyone to keep track of popular TV shows. They released the first installment of Nielsen Twitter TV Ratings, a weekly ranking of TV shows based on the total number of unique users who saw a related tweet on Twitter. Some people expected the list of Nielsen Twitter TV rankings to correlate with the traditional Nielsen rankings. They did not. At all. The biggest reason for the disparity in the rankings is that Twitter is not yet representative of the general US population. While almost 90% of Americans have heard of Twitter, only 18% of online US adults are Twitter users. According to the Pew Research Center, Twitter is most populated by 18- to 29-year olds. Yet, even among that group, only 30% of them use the site. If major TV advertisers will depend on the weekly audience numbers reported Nielsen Twitter TV Ratings to place their ads, they could be wasting their advertising dollars. This is a huge problem.
- Twitter's UI Is Overdue For A Redesign - The premise of 140 character tweets, #hashtags, retweets, followers, following and lists has been baked into Twitter's UI since it was launched in 2006. Although the latest UI is called the New Twitter, it is B-O-R-I-N-G. In short, Twitter needs to change its look so that it is more appealing, fresher and exciting. It must offer users more apps, ways to display their content, content filters and allow users more flexibility in customizing their home pages. If it is true that 651 million users have abandoned Twitter, this could be the biggest contributor to that problem.
It is obvious that Twitter has a lot of work if it is to continue to grow, increase revenues, generate profits, and remain competitive in the social marketplace. If investors believe that today's Twitter price truly reflects the true state of Twitter and its future growth potential, they could not be more mistaken.
Twitter Faces Glut of Shares As Lock-up Periods Expire
The supply of Twitter shares is set to increase dramatically in the months following the company’s IPO. For the first three months of Twitter’s life as a listed company, only the shares issued as part of the IPO will trade on the public markets; the remaining 87% of its outstanding shares will remain in “lock-up”—shares doled out to high-ranking employees and longterm investors that can’t be sold until long after the IPO. The lock-up structure is meant to stabilize the share price by staggering the available supply of shares.
Of the remaining 87% in lock-up, about 10 million shares held by non-executive employees will be available for sale in February; the bulk of the rest will hit the market in May.
When the expiration of Facebook’s lock-up period approached, short-sellers anticipated that employees and longterm shareholders would cash out and cause a glut of shares on the market, driving down the stock price. Groupon shares suffered a similar fate.
Twitter acknowledges the risk of a similar fate in its IPO filing, the S-1 (p.46). But no one on Wall Street seems all that concerned. That’s partly because many analysts think Twitter will IPO with a more reasonable valuation than Facebook’s, which would in theory make its post-lock up shares more attractive and stable in price.
Courtesy of an article dated November 7, 2013 appearing in The Wall Street Journal, an article dated October 4, 2013 appearing in All Things Digital, an article dated November 10, 2013 appearing in ValueWalk, Twitter's S-1 IPO Filing, an article dated November 6, 2013 appearing in Business Insider, an article dated October 15, 2013 appearing in Quartz, an article dated March 20, 2011 appearing in PBT Consulting Blog, an article dated November 14, 2013 appearing in MarketingProfs, and an article dated November 6, 2013 appearing in Quartz
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