Thursdaynight, we found out that Twitter confidentially filed their S-1 with the SEC. Over the past year, every money manager, financial advisor, financial analyst, and anyone involved in the investment industry speculated when Twitter would come public. We finally have a rough timetable, Q4 of 2013. Let's cover what the reactions are from Twitter's S-1 filing.
The SEC allows companies looking to go public to file confidentially if they have revenues below $1 billion. All signs point to Twitter taking advantage of that allowance. With a limited amount of ads on Twitter (sponsored tweets and sponsored trending items) many money managers, myself included, see this IPO as a chance for Twitter to add to the sales force. Twitter is coming public at a younger age than Facebook (FB). Twitter won't turn eight years old until March of 2014; while Facebook came public when it was over eight years old, Twitter will come public at just seven years of age. That may seem like an insignificant difference, but think of this: Facebook had over 845 million monthly active users in early 2012, and now Facebook has over 1.15 billion monthly active users as of Q2 2013. That represents a 27% growth in monthly active users in just sixteen months. If Twitter can duplicate that success, Twitter would grow from the 200 million monthly active user base to over 250 million monthly active users by this time next year. However, while Facebook was growing at triple digit percentages over the first four to five years from the point of inception, Twitter didn't achieve that type of growth until 2009 when it was already three years old. That shows that Twitter is still in a massive user growth phase, unlike Facebook's more mature status when the S-1 was filed. While Facebook had issues with their mobile platform when they came public, Twitter already has over 70% of users checking in through a mobile device. Twitter's revenue growth will come down to ad implementation in the "Twitter Feed".
Who Will Be Impacted: Twitter coming public isn't necessarily a direct impact on Facebook. This is a common misconception money managers and analysts have. Just this morning I pointed out this analogy to a money manager friend of mine: Twitter is this generation's New York Times, Facebook is this generation's Comcast (CMCSA). More and more users flock to Twitter to receive news. During the Boston Marathon bombings, Twitter users were actually correcting live television news broadcasts via Twitter. CNBC's "Twitter Revolution" special pointed out the importance of reporters' use of Twitter to gain more readers via followers. Plain and simple, the younger generation would rather check Twitter for news updates than read a local newspaper. At the same time, users turn to Facebook for entertainment (games, social interaction, social issues, etc.). While users are able to "share" items and news stories they feel are important to their friends, Facebook users more commonly use the platform as a way to socialize and receive entertainment.
Buzzfeed CEO Jon Steinberg said it perfectly on Jim Cramer's Mad Money Thursday night, "Facebook and Twitter are the railroad of the internet, and companies like ours are the cars on their tracks." Companies like News Corp. (NWSA), Comcast , AT&T (T), Dish Network (DISH), Bank of America (BAC), JP Morgan Chase (JPM), and just about every other Fortune 500 company are on both Facebook and Twitter. Social media provides an extremely efficient way for these companies to reach, communicate with, receive feedback, and promote with the customer base. Will there come a time when these larger corporations, or small businesses for that matter, have to pay for a presence on these social media platforms other than paid ads? That could be the golden key for both Twitter and Facebook. Don't think of these two social media powerhouses as direct competitors. Think of these future social media conglomerates as operating in two different spaces.
Twitter's upcoming IPO will benefit more than just Twitter itself. News broke that GSV Capital Corporation (GSVC), a growth investment firm, owns 35% of Twitter privately. Subsequently, GSVC is up over 10% Friday. Also, Goldman Sachs (GS) has been named as the lead underwriter for the Twitter IPO. This is a major blow to Morgan Stanley (MS), yet somewhat expected after the major Facebook IPO debacle. While we don't know for certain who all of the underwriters are, we can assume that there will be more underwriters than just Goldman. Also, we all remember the NASDAQ's (NDAQ) handling of the Facebook IPO. The likelihood that Twitter be listed on the NYSE (NYX) is much more likely than the NASDAQ.
Expectations: The most important factor of the entire Twitter IPO is receiving a proper valuation. Many analysts are expecting Twitter to receive a $15-$20 billion valuation. This would be a major mistake, and I believe Goldman Sachs is going to make a point of not letting the market overvalue Twitter. Facebook's post IPO plunge was caused by a gross overvaluation. While we all knew that Facebook would eventually nail down mobile ads, no one knew how long that would take. Consequently, Facebook's growth valuation was stunted drastically. Twitter has this same type of issue. Considering the confidential filing, we know that Twitter has less than $1 billion in revenue. If Twitter comes out and continually raises the IPO price, a la Facebook, expect to see another post IPO drop.
Goldman Sachs has been one of the best in the industry for nearly half a century. Don't expect them to make the same mistakes as Morgan Stanley. While it may somewhat limit Goldman's initial fees, it would be prudent of Goldman to approach the Twitter IPO as many small cap biotech companies do. Many small cap biotechs "undervalue" the potential growth of their drugs in order to receive an exceptionally positive IPO or secondary offering on the street. Using this model would ensure Twitter of a successful IPO. If Goldman has the foresight to exercise restraint with the IPO pricing, Twitter could enjoy a tremendous over-subscription and initial pop in price. A valuation of $10-$15 billion would be a perfect range for growth investors to ratchet up the price during the first week of trading. Giving Twitter a 17x current revenue valuation if priced at the top of the range, assuming revenue of $850 million, would ensure Goldman Sachs and Twitter a successful IPO. Some analysts believe that Twitter only has $500 million in current revenue, which would put a $15 billion valuation at a 30x current revenue. If those numbers hold true, we could be in store for Facebook IPO 2.0.
Additional disclosure: Always consult with a registered financial professional before adding a new position to your portfolio. Investing involves a significant risk of loss, as such never invest more than you can afford to lose.