Twitter's Debut


Twitter started trading on the New York Stock Exchange under the symbol TWTR today. According to Bloomberg, Twitter raised at least $1.8 billion by selling 70 million shares for $26.00, which is slightly above its revised target range of $23.00-$25.00 and much higher than the original range of $17.00 to $20.00 per share.

Besides the 70 million shares, underwriters led by Goldman Sachs (GS) have an over allotment option of another 10.5 million shares. If exercised, Twitter will raise $2.09 billion from the initial public offering (IPO), the second largest IPO after Facebook (FB) and overshadowing search giant Google’s (GOOG) IPO in 2004.

According to Bloomberg, Twitter’s current market capitalization stands at $14.1 billion. This equates to 12.4 times estimated 2014 sales of $1.14 billion, higher than Facebook’s 11.6 times but much similar to LinkedIn’s (LNKD) 12.2 times sales. However, including restricted stock and options, Twitter has approximately 694.8 million shares outstanding, which makes it worth $18.1 billion.

Although Twitter’s valuation is much smaller than Facebook’s $104.0 billion, the IPO has generated significant interest due to the company’s expanding customer base, strong advertising revenues, its solid positioning in the mobile platform and international expansion. We believe these may push shares up in the first day of trading.

At the end of the third quarter of 2013, Twitter’s average monthly active users surged 39.0% from the year-ago quarter to 231.7 million. The company processes more than 5 million tweets per day and has 100 million daily active users.

In the first nine months of 2013, Twitter earned revenues of $422.2 million, which soared 106.3% from the year-ago period. Domestic revenues surged 108.0% to $315.5 million and monthly active users were 52.7 million. However, Twitter has reported net loss in the last three years (fiscal 2010, 2011 and 2012) and also in the first nine months of 2013.

Despite the loss, we believe that Twitter’s strong position in the mobile platform (compared to Facebook at the time of its IPO) is a key growth catalyst. As per Twitter, almost 76.0% of average monthly active users access Twitter from a mobile device. Moreover, mobile advertisement contributes 70.0% of its revenues.

Twitter introduced its advertisement service only in 2010 and its revenue growth rate has gained stupendous momentum already. The company earns by inserting paid ads for a targeted audience, which resembles normal tweets. The success of this advertising model prompted Facebook to launch a similar ad product – Sponsored Stories – in 2012.

Market-research firm eMarketer expects Twitter to generate advertisement revenues of $582.8 million this year. For 2014, advertisement revenues are expected to grow 63.0% to $950.0 million. Twitter is expected to earn advertisement revenues of $1.33 billion by 2015.

International expansion is another significant growth catalyst as revenues surged 101.3% to $106.7 million in the first nine months of 2013. International contributed 25.0% of revenues compared with 17.0% at the end year-ago period. Twitter believes that higher investment on sales support and marketing activities in the international markets such as Australia, Brazil, Canada, Japan and the United Kingdom will boost revenues.

However, we note that despite higher international customer base (77%), Twitter earned only 36 cents as international advertising revenue per timeline view compared with $2.58 in the United States during the third quarter ended Sep 30, 2013.

In this regard, the fund generated from IPO will help Twitter to expand into new international markets such as Argentina, France, Japan, Russia, Saudi Arabia and South Africa. However, higher investments can hurt profitability in the near term.

We believe that investors will eagerly watch Twitter’s advertising revenue generation ability amid stiff competition from more established players such as Facebook, LinkedIn, Google, and Yahoo! (YHOO).

Currently, Facebook and LinkedIn carry a Zacks Rank #2 (Buy). Google and Yahoo carry a Zacks Rank #3 (Hold).

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