Twitter IPO Now Reminds Us Of Facebook's IPO Pricing Arrogance

Nov. 5.13 | About: Twitter, Inc. (TWTR)

Twitter (NYSE:TWTR), the San Francisco, California-based short-form social network, plans to raise $1.68 billion in its upcoming IPO. The firm will offer 70 million shares at an expected price range of $23-$25 per share-a significant increase from the firm's original $17-20 expected range. At the midpoint of the new range at $24 per share, Twitter will command a market value of $17.3 billion.

TWTR filed on October 3, 2013.
Lead Underwriters: Goldman, Sachs & Co, JP Morgan Securities LLC, Morgan Stanley & Co LLC
Underwriters: Allen & Company LLC, BofA Merrill Lynch, Code Advisors LLC, Deutsche Bank Securities Inc.

Summary
Twitter is a popular social network that limits users' posts to 140 characters of text. Twitter markets the simplicity of this system, arguing that it "democratizes content creation and distribution, enabling any voice to echo around the world instantly and unfiltered."

Democratization or not, Twitter certainly has been successful in attracting users; the firm boasts 230 million monthly active users and 100 million daily active users.

Many organizations, from political campaigns to news corporations to sports teams, use Twitter to stay connected with fans and customers; it certainly is considered a necessary element of a modern social networking presence. Twitter also achieved a significant public relations success through its heavily-publicized role in the Arab Spring uprisings. Some 500 million Tweets are generated by Twitter users every day.

Valuation
TWTR offers the following figures in its S-1 balance sheet for the nine months ending September 30, 2013:

Revenue: $422,215,000
Net Loss: ($113,852,000)
Total Assets: $992,803,000
Total Liabilities: $298,928,000
Stockholders' Equity: ($178,661,000)

Twitter has seen explosive recent revenue growth, but has not yet been able to generate profits. From 2011 to 2012, revenue increased by 198% to $316.9 million while net loss decreased by 38% to $79.4 million. From the nine months ended September 30, 2012 to the nine months ended September 30, 2013, revenue increased by 106% to $422.2 million while net loss increased by 89% to $133.9 million.

Business
Twitter must compete with numerous other social networking websites, some of which fulfill similar functions and some of which have added tools to replicate Twitter's user experience. Major competitors include Facebook (NASDAQ:FB), Google (NASDAQ:GOOG), LinkedIn (NYSE:LNKD), Microsoft (NASDAQ:MSFT), and Yahoo! (NASDAQ:YHOO); Twitter must also compete with smaller firms like Sina Weibo (NASDAQ:SINA), LINE and Kakao, which are based in Asia. Some of these firms are better capitalized and have more users than Twitter.

Management
As noted above, Twitter's current management must be viewed through the lens of the wildly excessive compensation that it has received. CEO Richard Costolo received a total compensation of over $11.5 million for 2012, while President of Global Revenue Adam Bain received $6.7 million and Senior Vice President of Engineering Christopher Fry received $10.3 million. Given the company's massive losses, this type of compensation can scarcely be justified, no matter how qualified the individuals in question may be.

Conclusion

Though Twitter's powerful brand name may lead to a meteoric IPO, we remain cautious on the social networking giant. We would not recommend buying the IPO in the aftermarket until the price settles down. Most of the IPO shares will be allocated to the underwriters favorite customers and we don't expect the typical investor to get any significant allocations.

Twitter is losing a genuinely shocking amount of money for a firm with so much ad revenue potential, which leads us to wonder if rumors of a mismanaged corporate culture has something to them, especially given the ludicrous compensation packages that top executives received in 2012-it's not every firm that loses nine figures for the year and rewards multiple executives with $10 million or more in total compensation.

Twitter's recent hike in its expected price range raises some disturbing echoes of Facebook 's arrogant failed IPO, as well. We don't think Twitter's going under anytime soon, but potential investors should closely consider whether they're getting sufficient value for TWTR's increased expected price tag.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in TWTR over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.