Many analysts were predicting a wild ride for Twitter shares on their opening day, but few predicted the pop the company’s shares produced on their first day of trading.
The consensus when Twitter filed for IPO was that it would price within a conservative valuation around $11-12 billion. The day before the IPO it was announced Twitter would head to its first day on the NYSE at a share price of $26, raising $1.82 billion in the process.
To many it looked like Twitter was looking to avoid leaving any money on the table by pricing at the higher range, however at the commencement of trading Twitter shares were $45.10 – an immediate 73 per cent premium on the IPO value.
In their first 10 minutes of trading the share price had pushed through $50 and suddenly Twitter was valued at $27.2 billion. In the first 10 minutes over 31 million shares changed hands. Once the trading day was over Twitter shares sat at $44.90, a stunning 73 per cent above the IPO price but marginally down on their opening price.
The Twitter pop was a very different scenario to what we witnessed when Facebook went public. Facebook set its IPO price at $38 and on day one saw no increase in price. Two weeks later it was hovering at $27 and had declined in value by 29 per cent, enraging many investors who were expecting a quick gain on one of the most hyped tech IPOs in history.
Facebook did eventually come good – it has been trading around the $50 mark recently and its consistent revenue and profit growth is almost unrivalled within the sector. Longer-term investors would have seen some solid gains, but the problem with tech stocks is many who jump on at the IPO stage simply are not in it for the long term.
The most recent similar situation to Twitter’s first day was LinkedIn. It priced its IPO in May 2011 at $45 a share at a $4.5 billion valuation but closed its first day at $93, with a market cap over $9 billion.
Even at the IPO its price some raised eyebrows. Many queried how a company that had only recently turned a profit – and a modest one at that, of $15 million for full year 2010 – could command such a valuation. Regardless, investors were enthused and sent the price skyrocketing on day one. However, over the next four weeks the market’s reaction subdued… four weeks after listing it had dropped 30 per cent from its trading high of $93 to $65.50.
In the short term ,can we expect a similar outcome from Twitter? Will it settle at a level closer to $30-35 as the hype subdues and the large volume trades become less frequent? Maybe. It’s hard to tell, especially as the ‘value’ applied to the company at this stage has really nothing to do with its financial performance to date and everything to do with the large levels of optimism surrounding tech stocks right now. They are levels of optimism that seem so large they are reminding some of the tech stock boom (and bust) of the late 90s.
But even if the price does drop in the short term, if Twitter follows LinkedIn’s longer-term performance trajectory then today's closing price of $44 may seem like a steal. Today LinkedIn closed at $211 – more than double its opening day peak price and just under five times its IPO price.
Seemingly the only losers today from the Twitter IPO were competing social/tech stocks. Facebook lost 3.18 per cent over the day, Zynga 6.6 per cent, LinkedIn 4.2 per cent and Google 1.4 per cent.
While Twitter has passed the IPO test, its next test is a much more important one – becoming a profitable business. So far this has proven elusive for the company. While this is considered acceptable for a privately funded company, when you are a public company with shareholders and a valuation north of $20 billion it is unlikely the market will tolerate operating losses for any extended period of time.