Yesterday, I wrote an article that discussed this week’s big story, the scheduled IPO of Twitter (TWTR), in general terms. From a potential investor’s perspective, the challenge facing Twitter is not a new one. In the fairly recent past, three other well known tech companies have offered shares to the public in similar situations. Google (GOOG), LinkedIn (LNKD) and Facebook (FB) were all popular and well established at the time they became available, but all faced a similar problem: how does a company monetize that popularity when they offer a basically free service?
That is the basic problem, but in each case the challenge, or rather the market’s perception of the challenge, was subtly different.
Google: GOOG is the poster boy for tech IPOs.
Figure 1: GOOG First 6 months
The search giant went public at an offering price of $85 per share, valuing the company at $23 Billion. That was the only time shares could be bought at that price and as most are aware, GOOG traded above $1000 on the NASDAQ for the first time last month.
At the time of the IPO, GOOG had been profitable for around 3 years and had a proven strategy for monetizing their popularity. They were the front line for people considering any purchase, so were able to demand money from advertisers for exposure to potential customers at a crucial time. They were able to build up a pool of cash that was used successfully over the years to diversify somewhat and build other revenue streams. It is hard to imagine now, but at the time there was no shortage of skeptics who maintained that Google was a fad that had limited potential, such as this 2004 Washington Post article that stated that GOOG at $109.40 was a bad long term investment.
Figure 2: LNKD First 6 months
LNKD was first offered to the public at $45 per share, valuing the company at around $4.3 Billion, or approximately 9x revenues. They too were already profitable at the time of the launch, but the natural limits to a professional networking site and, once again, how to monetize popularity were seen as potential stumbling blocks. The stock has never traded at or below that level since, having nearly doubled on its first day.
In many ways, as a non-professional, pure social media company, FB is the closest comparison to Twitter.
Figure 3: FB First 6 months
As you can see, the stock’s performance in its first six months was very different to that of either GOOG or LNKD. The first day saw a pop as unsatisfied demand was met, but fell back quickly below the launch price of $38, and stayed below that level until earlier this year.
That $38 price valued FB at around $100 Billion, or around 26 times the previous year’s revenues. Facebook was also already profitable at that time, but has spent the last year wrestling with the problem of how to turn their intimate knowledge of their users into cash.
So, given what we know, is TWTR more likely to be a GOOG or LNKD, where the IPO represents a great opportunity, or a FB, where caution is advised? With the news coming yesterday that the range for initial pricing has been raised to $23-25, it is hard to escape the feeling that it is going to be more like FB.
It is not that there is no possibility of the smart minds at Twitter finding a way to leverage the site’s popularity; rather, it is that they haven’t yet found it. Twitter’s presence in the mobile sphere presents its own problems regarding advertising revenue, but the trend for tweeting while watching TV presents an opportunity for targeted advertising unlike any other. Eventually it would come as no surprise if the second factor dominates, but a real solution has yet to be found.
As was the case with GOOG and LNKD, with reasonable valuation investors will happily buy potential, but the new price range values TWTR at around $13 Billion, or 37x 2012 revenue. Of course, this year has seen phenomenal revenue growth so far, but even given that, Twitter is hardly a bargain.
I started yesterday’s article by pointing out that, as is usually the case with highly publicized IPOs, individual investors looking to buy TWTR are likely to be disappointed. The question is, if that is you, should you just go ahead and buy on the first day of trading? To that question I will give a definite no. A quick glance at the charts above will show that in all three cases, GOOG, LNKD and FB, there was a reaction to that pop seen in the first day or two.
It is likely that those that missed out will have plenty of opportunity to buy in the coming weeks at reasonable price, but before they do they should ask themselves if they aren’t better off waiting until the monetizing strategies of the company become a little clearer. Rushing in to buy an unprofitable company on the assumption that popularity will translate into profits was all the rage in 2001, but we know better than that now, don’t we?
This is Part 2 of a 2-Part series. Part One may be found here: Twitter IPO: Should You Invest (Part 1)