Twitter IPO: Buzz builds over risks and (possible) rewards

November 6, 2013

Twitter will make its market debut on Thursday, potentially raising more than $1 billion from investors but also increasing pressure on the firm to convert its social currency into cash.

The social network said late Wednesday that it will price its stock at $26 a share, up from its original estimate of $17 and $20 and topping the revised estimate it delivered earlier this week of $23 and $25 per share. At the higher price, the money-losing company, which will trade under the ticker symbol TWTR, will be valued at about $18 billion.

The social network is following in the footsteps of tech brethren LinkedIn, Yelp and Facebook, which have gone public over the past year with varying degrees of success. All continue to struggle with similar questions: Can they attract enough advertising revenue to turn a profit, and do they have staying power with a fickle, tech-savvy audience?

Those upbeat on the company’s prospects point to Twitter’s base of 232 million active users and its prominent place in driving online conversations.

The flip side of that, however, is that Twitter has yet to turn a profit, has a niche audience and hasn’t developed a proven advertising model. The company reported $317 million in revenue over the past year, significantly less than the $3.7 billion in annual revenue Facebook reported ahead of its IPO last year.

Where Twitter users tweet around the world.

Twitter has sunk a lot of money into leveraging its loyal fan base, including allowing advertisers to pay for promoted messages that appear in a user’s feed. But, so far, it’s unclear whether those efforts will be successful.

Twitter’s ad products show potential, but the company might not be able to turn its platform into an indispensable tool for marketers, said Larry Chiagouris, a marketing professor at Pace University in New York.

As a whole, social media haven’t provided the return on investment that many advertisers want, he said. Twitter’s emphasis on real-time conversation about events such as the Super Bowl or the Academy Awards means even the strongest ads don’t have much lasting value, Chiagouris said.

“Those event-driven tweets are highly limited,” he said. “On the day-to-day kind of things, most people don’t have a lot to say. And most other people don’t care to hear what others are saying.”

Although Twitter’s ad revenue continues to rise — up to about 55 cents per user from 20 cents two years ago — analysts are concerned about a slowdown in user growth. Twitter already falls far behind competitors such as Facebook, which has more than 1 billion active users. Its user base grew by 5.5 percent in September, compared with growth of more than 10 percent in the same period last year.

The company’s focus on courting high-impact users such as entertainers, athletes and politicians, however, could help insulate it against a growing number of new competitors in the social media world, said Morningstar Equity Research analyst Rick Summer.

“We believe advertisers will be able to successfully target branding and direct response campaigns on Twitter better than most competitive platforms,” he said.

Twitter is betting its debut will be very different from Facebook's after pricing its stock above the range at $26 a share but deciding not to boost the size of the highly anticipated IPO. (Reuters)

Twitter is hoping to avoid much of the hype that contributed to Facebook’s post-IPO stock slide. The company took advantage of a provision in the Jumpstart Our Business Startups Act that let its initial IPO paperwork stay secret for weeks. Analysts also have said that Twitter’s decision to trade on the New York Stock Exchange rather than the Nasdaq was probably influenced by the glitches Facebook traders encountered during its 2012 IPO.

Still, Twitter’s decision to repeatedly raise its price target indicates that there is a lot of enthusiasm for the stock, said Aswath Damodaran, a finance professor at New York University. But long-term investors should wait until the buzz dies down, he said.

“The fact is, you can’t pay dividends out of buzz; you can’t create cash flows,” he said. “Let the mood and momentum play out.”

(Jeffrey P. Bezos, who owns The Washington Post, was an early investor in Twitter.)

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Hayley Tsukayama covers consumer technology for The Washington Post.
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