The Twitter IPO Almost a Full Day Later - No Longer Soaring?

By Tony Rizzo November 08, 2013

Yesterday's Twitter IPO followed the same oft-written script that so many other IPOs have followed (with the exception of Facebook). Less than a week ago, pre-IPO Twitter priced its stock at $17 - 20. That seemed very low to us (in our own earlier estimates we'd pegged it at $29). As its team made the IPO road show circuit, it began to sense that there was significant growing enthusiasm amongst the Wall Street brethren and along with that enthusiasm the Twitter team began to think they could price their shares higher - and ended up setting an IPO price ultimately of $26 per share.

To some degree it is a crapshoot on pricing, but here's an interesting perspective: Twitter's team wanted to show "respect" for the traditional ways of Wall Street, and wanted to both ensure the big investment boys would get their insider "pop" and that they would remain friendly to the company. Twitter very likely left over a billion dollars on the table because the dollars weren't worth having Wall Street mad at them over the next year or two. In contrast, Facebook took the money and "disrespected" Wall Street traditions. We'll return to this at the end of our article.

Below is Twitter's chart (courtesy of Yahoo Financial) as of 7:20 this morning. It has dipped down well below $45 (the volume numbers suggest these are simply tiny individual investor bid prices) though who knows what will happen when the market opens later this morning?

Analyst consensus estimates are that Twitter has 705 million fully diluted shares outstanding, which means the company has already seen a total evaluation ranging from $32+ billion or so at $46 per share to about $25 billion at $45. Irrational exuberance? Here is some perspective: Twitter now has roughly the same market cap as LinkedIn though it only has 40 percent of LinkedIn's revenue, no profit in hand and no guarantee that its business model will drive huge future revenue.

At $32 billion (it was even higher at about 3 pm yesterday, as the chart above shows, when the stock briefly jumped to $48+) Twitter would actually be worth more than half of the companies in the S&P 500! Is it unwise to invest further at this point at these price ranges? Here is an interesting tweet that appeared yesterday (a tip of the hat to CNBC for uncovering it):

Doug Kass, founder of the hedge fund Seabreeze Partners, doesn’t seem to think so. Kass tweeted on Thursday morning that he sold the majority of his stake in Twitter between $46.60 and $46.70, saying, “Reward v risk in TWTR is unattractive in high 40s.”

Kass of course is a consummate insider. He played the irrational exuberance to perfection and will now wait for Twitter to fall back to where it should be. Numerous financial analysts have weighed in with all sorts of technical analysis and the general opinion looks to be that Twitter should be worth somewhere between $22 and $32 per share. That suggests to us Twitter should have been priced at $30 (a dollar more than the $29 we'd pegged it at a few weeks ago).

So why didn't Twitter do so and take the money, knowing as it did that the stock would end up having a big first day? A good question!

Our story above about Twitter being respectful of Wall Street traditions and keeping Wall Street happy may sound almost ridiculous, but a particular USA Today article on "why Twitter flew while Facebook flopped" is a must read to get the full gist of it and how Wall Street likes to think of itself in these cases. Twitter "flew" because Wall Street insiders got the money instead of Twitter, whereas Facebook got all the money, so it flopped.

We "respectfully" disagree - our opinion is that Facebook flew and Twitter flopped exactly because Wall Street got the Twitter money. Facebook in the meantime has earned back its stock price the hard way - by actually delivering on the revenue stream promises of mobility. Twitter hasn't earned anything yet (well, that isn't true - it earned plenty Wall Street insider thanks).

Is the promise of Twitter as great as the enthusiasm? As we sign off here around 8:15 am the stock is listed at $43.80. Draw your own conclusions.




Edited by Cassandra Tucker

TechZone360 Senior Editor

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