Euphoria over Competitors IPO will Boost King of Social Media
By FSR Staff
Is Twitter (NYSE:TWTR) on the verge of offering investors a chance to ride the wave of social media exposure that they so desperately seek? Very likely, but what happens if retail investors get shut out of Twitter after it jumps several points tomorrow in the first day of trading? It may be time for investors to take a look at an old flame that shut them out of a similar frenzied IPO a year and a half ago, but has recently rediscovered its sex appeal: Facebook
With a market cap of $119 billion and latest quarterly revenues of $2 billion, Facebook's (NASDAQ:FB) metrics may give Twitter investors some pause when gauging an appropriate multiple to apply to the czar of the hashtag. Facebook is the gold standard, had a post IPO swoon, and competes for the same online eyeball. Facebook is getting looks as it showed off $422 million in earnings in the latest quarter and has $9 billion in its coffers.
For the time being, Twitter appears to be pricing between $23 to $25 dollars, implying an initial valuation of $14 to $16 billion. This potential gusher of an IPO would land Twitter trading at around 31 to 34 times past year revenues with earnings of $-49 million last year and $-69 million for the first half of 2013. Facebook on the other hand brought in $6.11 billion in prior 12 month revenues and $554 million in earnings over the same 4 quarters. Facebook currently trades at 19.5 times trailing twelve months revenue.
If we were to price Twitter at Facebook's level 19.5 times revenue, a valuation of $9 billion for TWTR seems more realistic. It is very interesting that $9 billion happens to be the amount that Facebook has in bank. Twitter trading at a Facebook valuation leads us to $14 to $15 per share. But of course this assumes Twitter deserves a Facebook valuation. If it can raise $1.75 billion on Wednesday with the IPO, this is a start. But earnings growth? That is the next step. Twitter boasts over 200 million users. Facebook has over 1.2 billion users and 4 times as many mobile users as Twitter has in total. Before summer of 2014, if Twitter struggles to show profits and the stock languishes, they may end up sending @Facebook a tweet "How do we deal with a struggling stock price?" #IPOfallout. For the time being, Mark Z. and company should smile and reply @Twitter "Good luck!" #beenthere.
After the hoopla fades this winter, Twitter's IPO should give Facebook a face-lift. The lesson here? Don't buy the hype, at least on the first day.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.