Twitter, the San Francisco-based social networking giant, announced its upcoming IPO via tweet (naturally) on September 12. The company has made no indication of the likely date of the IPO, but analysts speculate that the offering will occur by early 2014. Goldman Sachs (GS) is expected to be the main underwriter; JPMorgan Chase & Co. (JPM) and Morgan Stanley (MS) are also expected to take part in the deal.
It's impossible to provide exact figures for Twitter's finances until the company releases more information to the general public, but the announcement has set the web on fire with analysis and gossip. eMarketer pegs the company's 2013 revenue at $583 million, compared to a 2012 estimate of $288 million and a 2011 estimate of $140 million. If eMarketer is even in the ballpark, Twitter's revenue growth has been incredible, and should be pushed even higher in 2014 with increased mobile advertising (approximately half of Twitter's current ad revenue comes from mobile). The value of the company is even more difficult to establish, and every keyboard pundit has a different opinion on the subject. There seems to be a general consensus that the value exceeds $10 billion, but exactly how far beyond $10 billion is anybody's guess.
Twitter filed its IPO under the new Jump-Start Our Business Startups (JOBS) Act, which allows it to keep financial information under wraps until much closer to the date of the IPO than traditional IPOs have allowed. The provision of the JOBS Act that allows Twitter to withhold information is only usable by companies with under one billion dollars in revenue, so that much at least can be said of the company's financial state. The use of the JOBS Act to maintain the secrecy surrounding Twitter's finances has ruffled some feathers, but serious investors will hardly avoid the stock over this perceived slight on the part of the company.
Saudi Prince Alwaleed bin Talal, a billionaire businessman and owner of Kingdom Holding, has already publicly stated that Kingdom will not sell any of the shares afforded by its $300 million Twitter investment in the upcoming IPO. Noting that he believes Twitter will make its market debut late this year or early next year, the Prince also projected the value of the company at between $14 and $15 billion. Though this figure is potentially biased by bin Talal's ownership in the company, his words should not be dismissed; under his leadership, Kingdom Holdings has seen tremendous success through timely investments in companies like Citigroup (C) and News Corp (NWS).
Until Twitter releases more of its audited financial information to the general public, we can't make a solid recommendation either way (and neither can anyone else -- don't buy the buzz until we're closer to the IPO). That said, the future looks bright for Twitter based upon its massive revenue growth and the increasing role of social networks in advertising across the world. Though Facebook (FB)'s disastrous IPO is troubling for social networking stocks, it should be noted that Facebook has since more than recovered and has surpassed its initial price by approximately 20%. Twitter certainly won't lack for investor interest when the company finally does go public; our initial hunch today is that Twitter will indeed fly.
Social networking has reinvented the web advertising industry, and is now amongst the foremost concerns of any advertisement campaign. Despite low conversion rates (Facebook posts between 1-3% conversion, and Twitter is estimated to be under 1%), companies are purchasing social network ad space at skyrocketing rates, and few advertising methods are the equal of social networks in terms of simulating organic, word of mouth growth. Continued expansion into the market for mobile advertising has proven to be yet another cash cow.
Twitter's announcement inevitably drew comparisons to Facebook's terrible IPO, but it's hard to believe that Twitter and its underwriters won't have learned from Facebook's mistakes. The company will try to avoid the arrogant bluster that surrounded Facebook's offering, which probably drove away savvy investors and certainly set up an unreasonable expectation for the stock's growth. Twitter will no doubt keep its price reasonable to give the stock a chance to grow after it is released in the IPO and avoid the face-first plunge that Facebook treated its investors to. It will also presumably offer a smaller portion of the company in order to maintain high demand in the stock's early days of trading. The absence of an Oscar-winning feature film throwing Twitter's founders and executives in a less than flattering light can't hurt, either - all of Facebook's hype looked rather flat in the aftermath of The Social Network and the story about General Motors' (GM) bad experience with advertising on Facebook just days before the IPO.
There is some concern about Twitter's management structure, especially in light of media coverage generated by disgruntled former employees. The company was originally built with middling engineering talent, which isn't uncommon for a start-up, but former employees have often complained that seniority, rather than ability, has dictated leadership positions. This problem is compounded by the fact that these original, not especially competent engineers were permitted to hire their own teams after they were promoted, effectively entrenching themselves within the company.
Twitter also has a reputation for gossip at the upper levels of its management structure - perhaps unavoidable in the social networking business, but nonetheless potentially damaging to corporate culture, possibly risky for corporate security, and potentially can lead to problems with the SEC. The type of explosive revenue growth that Twitter has experienced in the past few years implies a rapidly expanding organization, as well, and inefficiencies and redundancies can quickly develop in such an environment. It bears remembering that Twitter is mere seven years old, and has never had the opportunity to develop a stable management team outside the context of surging revenues.
Additional disclosure: This article was written for informational purposes. Investors should read the S-1 when it is released and should consult with their financial adviser before making any investment purchases.