Twitter is a young company generating large losses as it competes in a highly uncertain sector of the economy. And that is exactly why investors clamoured for a piece of its initial public offering, which closed on Wednesday evening.
Twitter’s shares were priced at $US26, valuing the company at $US18.1 billion ($19 billion). At that valuation, each of Twitter’s 230 million users around the world is worth $US78. Going by such numbers, the public offering has been a success for the company, which raised $US1.8 billion from the offering, a hefty war chest.
All this is impressive for a company that has racked up more than $US300 million of losses in the past three years, and may not show real profits until 2015.
But investors are betting that Twitter is destined to become wildly profitable as advertisers pay it increasing amounts to reach consumers who use the service.
But if recent history has anything to teach, the euphoria is unlikely to last. The fast-changing world of technology can be cruelly unpredictable. It tripped up companies such as Groupon and, for a while, Facebook, Twitter’s larger rival. If Twitter also slips up, its shares could tumble fast, too. ‘‘That’s always the peril of high-growth stocks,’’ said Lawrence Levine, a partner at McGladrey, an accounting firm. ‘‘So much of the valuation is embedded in the expected growth rate.’’
Wall Street’s bullish case for Twitter is seductively simple.
The company has established itself as a major hub for social media activity, alongside Facebook and Google. Now, as advertisers devote more of their spending to internet campaigns, analysts expect Twitter will almost inevitably rake in a sizeable share of that spending. Its revenue should – in theory – soar. Analysts say Twitter could post revenue of $US1.9 billion in 2015, three times what the company is expected to make this year.
Yet Twitter’s stock price, even before its first day of trading, may already reflect most of that growth. Shares of Twitter begin trading on the New York Stock Exchange on Thursday.
The company could start trading with a market value of about 11 times its expected 2015 revenue, according to estimates from Sterne Agee. At that multiple, Twitter would already be pricier than other social media companies.
Twitter is not expected to be profitable under generally accepted accounting rules until 2015. Sceptics wonder whether this is because the company is struggling to find ways to serve advertisers.
To a certain extent, social media companies are black boxes, making them harder to value than companies with more visible, conventional businesses. A company like Twitter sits on an enormous number of user interactions, and it has to determine how to exploit those for advertisers. But it has offered few specifics on exactly how it will enable advertisers to place the right ad with the right users.
After months of foundering, Facebook found ways to increase its advertising revenue, so far proving its doubters wrong. The temptation is to expect Twitter to do the same. But the company may already be priced for perfection.
‘‘One day Twitter will make money,’’ said Anup Srivastava, an assistant professor of accounting at Northwestern University’s Kellogg school of management. ‘‘But it’s not clear why anyone should pay this much for it today.’’