There was hype. There was hope. And when it came to Twitter's (NYSE: TWTR) IPO, there was plenty of money being made by those who had shares to sell.
When Twitter planned its sharemarket listing, the original price was planned to be in the range of US$17 to US$20. Strong demand saw the range bumped up to US$23 – US$25, before the final pre-IPO price of US$26 was set.
So strong was the demand for Twitter shares that the first public trade was for US$45.10 – a full 73.5% ahead of its IPO price. At one point, the stock had almost doubled, when shares traded above US$50. In the end, shares closed at US$44.90, just below that opening trade price, but still delivering a 72.5% gain for investors who were lucky enough to have purchased shares in the IPO at US$26.
So Twitter's IPO was a success, right? Well, it depends who you are and what you were looking to get out of it.
The insiders and 'preferred clients' of selected stock brokers and investment banks who picked up shares at US$26 are pretty happy – whether they sold or are still holding, a 70%-plus gain is not bad for a day's 'work'.
Those who bought eagerly in early trade are probably within a few percentage points of breaking even – so, if they tried to buy early and 'flip' the shares later in the day, that strategy wasn't exactly staggeringly successful.
And if you bought shares today with the intent of holding them for the long-term, you've paid a very high price relative to today's sales – the company made a loss last quarter – and you believe that the company can continue to grow its user base and its revenues, with a view to becoming massively profitable in the years ahead.
Just how high is a 'very high price'? Twitter is now valued at over US$25 billion. And we can't use an earnings-based valuation, because, well, the company is making a loss! When it comes to high-growth, loss-making businesses, analysts usually turn to the price-to-sales ratio. On that basis, Twitter is now selling at 78 times 2012 sales. That compares to Facebook at 17 times sales and our own Woolworths (ASX: WOW) at 0.8 times sales.
Does Twitter have more sales growth ahead of it than Woolworths? Absolutely – but Woolworths makes profit, and tonnes of it. Put another way, Twitter is now three times as valuable as our own Coca-Cola Amatil (ASX: CCL) – and Coke made $421 million in profit last year!
The answer then is growth, and for Twitter shareholders, hopefully lots of it.
And it's a brave person who says Twitter can't prove the doubters wrong. Google was once decried as woefully overvalued. And when Amazon was much smaller and losing much more money, its shares seemed to be priced for perfection. Of course, MySpace was once the 'next big thing', too… until it wasn't.
History will show whether the doubters or true believers were right when it comes to Twitter's US$25 billion market valuation after its first day as a public company. I wouldn't rule out the possibility of Twitter going on to prove the naysayers wrong, but the odds aren't in its favour – or the favour of shareholders buying at US$45 per share.
For @twitter shareholders, it's a case of #highhopes. #timewilltell.
