Business Today

After Twitter's hot IPO, now comes the hard part

By the closing bell, Twitter that reinvented global communication in 140-character bursts was worth nearly as much as Yahoo Inc., an Internet icon from another era, and only slightly less than Kraft Foods , the grocery conglomerate founded more than a century ago.

twitter-logoAssociated Press | November 8, 2013 | Updated 15:58 IST
After Twitter's hot IPO, now comes the hard part

Twitter's stock took to its wings in its public debut, closing up more than 70 percent. The day flew by with nary a hitch and gave birth to a new batch of Silicon Valley millionaires - even a few billionaires.

Now comes the hard part. With Twitter's value skyrocketing in just a day, the 7-year-old company that's never turned a profit and has just a fraction of Facebook's user base must prove to investors that it's worth the money. Twitter stock ended Thursday's trading at $44.90, giving the company a market value of $31 billion. That's $13 billion more than on Wednesday night, when the company set its IPO price at $26.

"Ultimately what you want is a nice pop," said Roger Entner of Recon Analytics. "Everyone walks away with smiles from ear to ear."

Twitter, he added, "now just has to deliver on all this."

By the closing bell, the social network that reinvented global communication in 140-character bursts was worth nearly as much as Yahoo Inc., an Internet icon from another era, and only slightly less than Kraft Foods, the grocery conglomerate founded more than a century ago.

The stock 's sizzling performance seemed to affirm the bright prospects for Internet companies, especially those focused on mobile users. And it could invite more entrepreneurs to consider IPOs, which lost their luster after Facebook's 2012 public debut was marred by technical glitches. In Silicon Valley, Twitter's IPO produced millionaires and billionaires, some of whom are sure to fund a new generation of startups.

Twitter worked hard to temper expectations ahead of the IPO. All that was swiftly forgotten with the stock's opening surge.

But the excitement may not last. The company isn't expected to turn a profit until 2015. That could be a long wait for investors, especially if Twitter's revenue growth slows. There are already signs that its user growth is decelerating.

By Thursday's close, Twitter was valued at close to 48 times its projected 2013 revenue of $650 million. In comparison, Facebook trades at about 16 times its projected 2013 revenue, according to analyst forecasts from FactSet.

Google Inc., meanwhile, is trading at about 7 times its net revenue, a figure Wall Street follows that excludes ad commissions.

Twitter's stock looks so expensive to Brian Wieser of Pivotal Research that the analyst downgraded his rating on the stock to "sell" from "buy" on Thursday morning. While his overall view of the company's prospects remained positive, Wieser thinks the high $20s or low $30s is a more reasonable range.

Twitter, Wieser added, faces a slew of risks in the coming months, including the possibility that it will need more money beyond its IPO proceeds to fund its business.

Twitter raised $1.8 billion Wednesday night when it sold 70 million shares to select investors for $26 each. Had it priced the stock at $30, for instance, the company would have taken away $2.1 billion. At $35, it would have reaped nearly $2.5 billion.

But Twitter was purposely conservative in its approach. The most anticipated initial public offering of the year was carefully orchestrated to avoid the glitches and letdown that surrounded Facebook's first appearance on the Nasdaq 18 months ago.

Trading on the New York Stock Exchange under the symbol "TWTR," shares opened at $45.10, 73 percent above their initial offering price. In the first few hours, the stock jumped as high as $50.09. Most of those gains held throughout the day, with Twitter closing at $44.90, despite a broader market decline.

The narrow price range indicated that people felt it was "pretty fairly priced," said JJ Kinahan, chief strategist at TD Ameritrade.

Named after the sound of a chirping bird, Twitter's origins date back to 2005, when creators Noah Glass and Evan Williams were trying to get people to sign up for Odeo, a podcasting service they created. Odeo didn't make it.

By early 2006, Glass and fellow Odeo programmer Jack Dorsey began work on a new project: teaming with co-worker Christopher "Biz" Stone on a way to corral text messages typically sent over a phone.

It was Glass who came up with the original name Twttr. The two vowels were added later. The first tweets were sent on March 21, 2006.

By 2007, Twitter was incorporated with Dorsey as the original CEO and Williams as chairman. Dorsey and Williams would eventually swap roles. Both remain major shareholders, though neither runs the company. Glass, meanwhile, was effectively erased from Twitter's history, writes New York Times reporter Nick Bilton in "Hatching Twitter: A true story of money, power, friendship, and betrayal."

Since those early days, the site has attracted world leaders, religious figures and celebrities, along with CEOs, businesses and countless marketers and self-promoters.

The company avoided the trouble that plagued Facebook's IPO, which suffered technical glitches. As a result, the Securities and Exchange Commission fined Nasdaq $10 million, the largest ever levied against an exchange.

The glitches had lasting consequences for Facebook, which closed just 23 cents above its $38 IPO price on that first day and later fell much lower. The stock needed more than a year to climb back above $38. Those problems likely led Twitter to the NYSE.

Research firm Outsell Inc. puts Twitter's fundamental value at about half of the IPO price, said analyst Ken Doctor. That figure is based on factors such as revenue and revenue growth.

"That's not unusual," Doctor said. "Especially for tech companies. You are betting on a big future."

As a newly public company, one of Twitter's biggest challenges will be to generate more revenue outside the U.S.

More than three-quarters of Twitter's 232 million users are outside the U.S. But only 26 per cent of Twitter's revenue comes from abroad. The company has said that it plans to hire more sales representatives in countries such as Australia, Brazil and Ireland.

Here are some interesting figures from Twitter Inc.'s historic IPO:

- $1.8 billion: The amount that Twitter Inc. raised for itself on Wednesday night.

- $13.1 billion: The amount that Twitter's market value grew on its first day of trading Thursday.

- 35: The percentage of people who think Twitter will be successful in five years, according to an AP-CNBC poll.

- 55: The percentage of people who have never noticed an ad on Twitter.

- $26: The share price offered to institutional investors Wednesday night.

- $44.90: The closing price of Twitter shares on Thursday.

- $30: What Pivotal Research analyst Brian Wieser says Twitter shares are worth.

- 232 million: The number of monthly active Twitter users in the quarter through September.

- 39: The percentage growth in active users from a year ago.

- $134.47: The market value of each Twitter user.

- 2006: The year the first tweet went out.

- 2015: The year most analysts expect Twitter to become profitable.

- 28: The multiple used to value Twitter based on its 2013 projected revenue at its IPO price.

- 16: The multiple Facebook shares trade at based on 2013 projected revenue

- 7: What Google's shares trade at based on 2013 projected revenue.

- 117.7 million: The number of Twitter shares that changed hands Thursday.

- 70 million: The number of shares Twitter actually issued, excluding optional additional shares based on demand.

- $2.56 billion: The value of co-founder Evan Williams' shares.

- $1.05 billion: The value of chairman Jack Dorsey's shares.

- $345 million: The value of CEO Dick Costolo's shares.

- $0: The value of two scratch-off California lottery tickets found on a rough street outside of Twitter's San Francisco headquarters.

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