Specter of Facebook's ugly debut looms over Twitter IPO

By Jeff Benjamin

Sep 22, 2013 @ 12:01 am (Updated 4:41 pm) EST

Ever since Twitter Inc. two weeks ago said that it had filed to go public, the temptation has been to draw comparisons to the now-infamous May 2012 public offering of Facebook Inc.

The popular theory seems to be that Twitter should be able to avoid many of the missteps that befell the much-hyped Facebook offering, when the stock price plummeted more than 50% within four months of the initial public offering.

It took until this month — 16 months after the initial stock sale — for Facebook shares to climb back up to the $42 offering price. The stock is up more than 130% from its low point last year, but the ride was probably not what most investors were anticipating, assuming that they even hung on from the beginning.

That brings us back to Twitter and an IPO that likely will take place in late November, if all goes according to plan.

Considering the primary business operation of a highly popular social-media platform, it is difficult to imagine how the stock offering won't build at least as much hype and anticipation as did Facebook's.

With that in mind, the issue for financial advisers should be less about whether Twitter will make the same mistakes as Facebook and more about whether investors will make the same mistakes.

“I would stay away from the Twitter IPO until we see some solid numbers,” said Eric Covino, president and founder of Creative Signals, a firm specializing in online markets and business strategies.

Twitter, which filed confidentially with the Securities and Exchange Commission as a way to keep its financial data private for now, will aim to walk the fine line of whipping up enough enthusiasm for the stock, but also pricing it to have some upside after the IPO.

$10.5 BILLION VALUATION

GSV Capital Corp., an early Twitter investor, has valued the company at $10.5 billion, which is up 5% from a May estimate, according to Bloomberg.

According to published reports, Twitter, which was launched in 2006 and didn't start earning advertising revenue until 2010, is projecting nearly $1 billion in sales next year.

Research firm eMarketer Inc. estimates that Twitter's ad revenue this year will total about $580 million.

Such growth projections fall in line with internal Twitter targets of building the user base to 400 million by year-end, from about 200 million at the start of the year.

However, as Mr. Covino pointed out, those growth projections from Twitter chief executive Dick Costolo are very aggressive and way behind schedule at this point.

“This year, they have been adding about 4 million users a month, which puts them at about 240 million users, or on pace for about 30% of their growth projection,” he said.

At the current pace of growth, Twitter likely will reach 260 million users by year-end, 140 million short of projections and something that Mr. Covino said shouldn't be ignored.

“Where is the disconnect that has Twitter off by 70% in its user growth rate?” he said. “That's kind of disturbing, and it makes me wonder what's going on inside the company if executives are off by that much.”

In the context of the broader IPO market, the time is clearly ripe for just about any solid and well-run company to enter the public equity markets.

IPO tracking firm Renaissance Capital LLC reported that the average return of the IPOs completed so far this year is 34%.

The Renaissance Capital Global IPO Fund (IPOSX), which purchases IPOs at the time of offering and in post-IPO trading, is up 43% this year.

The market is peppered with examples of strong performance of recent IPOs.

For instance, pharmaceutical research firm AbbVie Inc. (ABBV) is up nearly 38% since its January IPO.

Shutterstock Inc. (SSTK), which operates an online marketplace for digital imagery, has gained more than 250% since it went public 11 months ago.

And biopharmaceutical company Stemline Therapeutics Inc. (STML) has enjoyed a nearly 265% rally in its stock price since it went public in January.

IN THE PIPELINE

According to Renaissance Capital, there already have been 174 IPO filings this year, compared with 141 for all of 2012. And so far this year, 132 companies have actually gone public, compared with 128 for all of last year.

“The IPO market has produced strong returns for investors recently, and this bodes well for companies seeking to go public, including some of the major names in the pipeline,” said Renaissance Capital principal Kathleen Smith.

In addition to Twitter, such marquee names as Chrysler Group LLC and Hilton Worldwide have recently filed to go public. Also, Empire State Realty Trust Inc., which owns multiple buildings in the New York area, including the fabled Empire State Building, is expected to launch its IPO in early October.

“The IPO market is picking up partly because enough time has elapsed since the [public relations] catastrophe of the Facebook IPO,” said Ryan Issakainen, an exchange-traded-fund strategist at First Trust Advisors LP.

“This is a good time for companies to go public, because the market has performed well and you're getting better valuations, and there's some pent-up demand for new IPOs,” he said. “The Facebook effect is finally wearing off.”

And that might be the scariest part of all; investors might be too eager to jump back in, chasing another familiar but opaque IPO.

jbenjamin@investmentnews.com Twitter: @jeff_benjamin

  @IN Wire

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