Twitter (TWTR) has launched one of the most exciting initial public offerings (IPO's) of the year. The shares were priced at $26, above the target range of $23 to $25, giving Twitter a market value of $17 billion. When trading opens Thursday it is likely the stock will head higher given the high demand for the issue. Not bad for a company that lost $80 million last year and will lose even more this year.
The excitement is all about Twitter's user base of 232 million. The question is how stable that user base is and how fast it will grow, to which one must add the ability of the company to convert users into revenue on some model or other. I could not say all that in 140 characters.
A lot of observers like to compare Twitter to Facebook (FB) which did not receive as warm a welcome in its IPO. But Facebook is a much larger and more profitable company than Twitter, with 12 times its revenues, 5 times its user base and over 7 times Twitter's share of mobile advertising. Granted Twitter is a lot younger than Facebook, if a few years can be considered a lot. It seems to an old man like me both were created quite recently, and neither has attracted me as a user at this point.
In any event, the IPO came with a lot of hype and excitement and the expectation that Twitter might raise as much as $1.75 billion, second only to Facebook in recent internet IPO's, and a lot more than Amazon (AMZN), Microsoft (MSFT), eBay (EBAY), Apple (AAPL) or even Google (GOOG).(click to enlarge)
The expectation was more than met and Twitter raised $1.8 billion. The trading today will tell the tale. The real issues with Twitter are not only valuation but also business model. Here the jury is still out and it may deliberate for quite a while. Metrics worth watching are the percentage of Twitter subscribers who do not use their account and the number who opened an account only to shut it down. On these metrics it does not compare favorably to Facebook.
Facebook's users are pretty well engaged with 88% using their Facebook account and only 7% inactive. A mere 5% of Facebook subscribers thought better of it and closed their accounts. Twitter's record is not so pretty. Fully 36% of Twitter's user base simply do not use their accounts at all and another 7% have closed their accounts.
This sort of churn makes Twitter less interesting as an advertising medium. While Facebook knows a lot about each user and can target advertisements so that they reach people who may have an interest in the product being advertised and be therefore both more effective for those who are interested and less offensive to those who are not, Twitter must use more of a shotgun approach somewhat similar to a mass mailing or newspaper insert. Everyone gets the message even if it is not always welcome.
Finding the right model to monetize the millions of Twitter users is the key. It is not obvious to me that Twitter has it right yet. Maybe they will get it right, but for my money the risks outweigh the chances of success and I think the stock is overvalued by at least a multiple of five to ten at this stage of its life. Twitter's IPO may be the piece of the bull market puzzle that definitively sets the market top, since it is only at a market top that enthusiasm is so high that even tulip bulbs can have an enormous value. Or not!
In my view Twitter is a good short. I was not in the IPO but will be looking for an opportunity to short the stock over the next few days.