The Twitter IPO: What You Need to Know About This Mega-Deal
Social media giant Twitter filed to go public.
Yesterday afternoon, Twitter filed its S-1 with the SEC and that means planet Earth is about to be hit with the biggest IPO since Facebook's (NASDAQ:FB) ill-fated baptism in 2012.
So let's get right to it -- here's what investors need to know about this deal:
Twitter Learned a Lot From the Facebook Mess
First things first -- Twitter seems to have learned from Facebook's IPO debacle, which was derailed by three factors:
1. An overpricing of the deal at $38 per share in the face of then-weakening fundamentals.
2. A Nasdaq (NASDAQ:NDAQ) market glitch that mucked up the initial trading.
3. Controversy over selective disclosure after the IPO underwriters, led by Morgan Stanley (NYSE:MS), cut their Facebook estimates during the road show, but allegedly only told big clients.
Interestingly enough, Twitter's head of corporate development, Cynthia Gaylor, was a managing director at Morgan Stanley, where she worked on IPOs and other transactions for high-profile tech companies like LinkedIn (NYSE:LNKD), Netflix (NASDAQ:NFLX) Splunk (NASDAQ:SPLK), Palo Alto Networks (NASDAQ:PANW), Zynga (NASDAQ:ZNGA), and of course Facebook.
Twitter's IPO will be lead-managed by Goldman Sachs (NYSE:GS), presumably at least partially as a result of criticism of Morgan Stanley's handling of the Facebook deal, though many are also giving credit to star Goldman banker Anthony Noto for this victory.
And while it hasn't been announced yet, we can assume there's a good chance Twitter will land on the New York Stock Exchange (NYSE:NYX).
But just as Twitter learned from Facebook's initial challenges...
Twitter Will Benefit From Facebook's Phoenix-Like Rise in Mobile Advertising
Courtesy of lousy earnings results and post-IPO bitterness, Facebook eventually sank from its $38 IPO price to $17.55 on September 4, 2012.
However, Facebook's mobile presence quickly went from being an earnings hindrance to a catalyst for outperformance, and following a monster Q2 that saw mobile ad revenues skyrocket, Facebook is hovering around $50.
So check out this key excerpt from Twitter's S-1: (emphasis mine)
Mobile has become the primary driver of our business. Our mobile products are critical to the value we create for our users, and they enable our users to create, distribute and discover content in the moment and on-the-go. The 140 character constraint of a Tweet emanates from our origins as an SMS-based messaging system, and we leverage this simplicity to develop products that seamlessly bridge our user experience across all devices. In the three months ended June 30, 2013, 75% of our average MAUs accessed Twitter from a mobile device, including mobile phones and tablets, and over 65% of our advertising revenue was generated from mobile devices. We expect that the proportion of active users on, and advertising revenue generated from, mobile devices, will continue to grow in the near term.
Now that mobile is so prized by investors, Twitter is in the right place at the right time.
But Wait, How Does Twitter Make Money?
On the advertising side, the company generates revenue from three products: Promoted Tweets, Promoted Accounts, and Promoted Trends.
In other words, brands pay to attach themselves to activity on Twitter.
As an example, I searched for the hashtag #investing on Twitter.com, and found that American Express (NYSE:AXP) was advertising on the results page:
Here's a Promoted Account, tweets from which show up in users' streams, in this case, Verizon Wireless USA (NYSE:VZ):
And on the left side of the Twitter page where trending topics are down, you can see that the film Gravity is being promoted:
And given how important Twitter is as a real-time news source, I would encourage you to go back and read this piece from 2011 explaining how Twitter was profiting from the Occupy Wall Street movement.
Twitter also makes some money from data licensing agreements.
So How Are Revenues Growing Anyway?
In a word, FAST:
So in the first half of 2013, Twitter's revenues were up a whopping 107%, meaning it's growing way, way faster than Facebook was when it went public.
This is courtesy of Twitter being at an earlier point in its lifecycle, as the service currently had 218 million monthly active users last quarter vs. 1.15 billion for Facebook.
So How Is User Growth Trending?
As you can see on this chart, Twitter is still adding users at a pretty rapid rate:
While growth is slowing (a natural occurrence), even if quarter-over-quarter growth slows to, let's say, 5%, that still implies annual growth of 22%, and in any case, Facebook, the most obvious comparable company, is growing revenues much faster than users.
Last quarter, Facebook had revenue growth of 53%, despite growth of just 21% in monthly active users.
But What About Profitability?
Twitter is losing money. Year-to-date, it has posted an operating loss of $63 million vs. a loss of $47 million the year before. I'll discuss below whether anyone's going to care.
And What About the International Markets?
Here's where things get interesting.
For the first half of 2013, Twitter generated 25% of its revenues from overseas markets, primarily Australia, Brazil, Canada, Japan, and the United Kingdom.
At the very least, these markets combined should equal if not surpass the US in size, and the company should receive an additional boost from smaller markets.
So What Do We Make of All This?
Twitter is growing revenues at a huge rate, and while it isn't profitable, I doubt it's going to matter to anyone.
Mobile advertising is hot, and Twitter's S-1 effectively markets the company as a mobile powerhouse, which is the truth!
Remember what happened with Facebook last quarter -- investors went absolutely gaga as mobile advertising hit 41% of revenues. Twitter's at 65%.
Additionally, relative to Facebook, Twitter is still pretty small.
Whether Twitter can grow its user base and increase its monetization rate the way Facebook has, we don't know. But investors tend to extrapolate near-term momentum far into the future, and I suspect people will very gladly value Twitter on revenue and earnings estimates far into the future.
Additionally, those who missed out on LinkedIn, or who were scared to get in Facebook on its way up to $50, are likely to be eager to get in on Twitter.
Combine this with the likelihood that Goldman Sachs and the other underwriters will price the deal conservatively, and you have the perfect recipe for a big first-day pop.
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