Twitter Carefully Plots IPO Course

by Matt Klassen on October 28, 2013

As the excitement builds around Twitter’s imminent initial public offering—slated for November—the microblogging social network wants to take things slowly, lest it repeat the follies we saw last year from its estranged sibling Facebook. Therefore, the company has plotted a conservative tack, setting the price for its IPO between US$17 and $20, according to a document recently filed with the Securities and Exchange Commission—as opposed to Facebook’s initial stock price of $38 that ballooned to $45 before plummeting back to earth.

With the Facebook disaster still fresh in the memories of investors, it’s certainly a wise move on Twitter’s part to take a distinctly more conservative approach, but there’s more reason for Twitter to be cautious, it’s not even a fraction as profitable as its social networking rival was when it burst onto the market.

“While Twitter has created a number of good revenue opportunities such as sponsored tweets and other advertising, their potential revenue and products to bring to market are still question marks,” Chris Silva, founder and principal analyst at High Rock Strategy, told the E-Commerce Times, “A conservative opening price point seems a good way to avoid a market disappointment while leaving the stock price plenty of running room as their profit models mature.”

The simple fact for Twitter is that unlike Facebook the monetization of the microblogging site, something that should be forefront on every potential investors mind, is a big question mark. Sure the site is popular, sure everyone tweets, but can Twitter find a way to make money off of that. The fact of the matter is Facebook had a basic framework in place already before its IPO and despite that the entire house of cards still came crashing down; a point that should have many questioning whether Twitter is worth the risk.

But as we’ve seen time and time again, many investors simply don’t question, don’t do their due diligence, and often get burned as a result, particularly with hot companies like Twitter. “The average investor is most often hurt when buying ‘familiar’ brands without a deep understanding of the potential monetization strategies of those brands,” said Silva, “It’s the reason Apple stock sees such wild fluctuation the day of an announcement, whether popular or not.”

Simply put, “Investors in IPOs in hot companies often forget the basics of investing,” noted securities attorney Andrew Stoltmann in a recent interview. “Long term, earnings drive share prices. Suspending rational thinking is a recipe for investing disaster; unfortunately, many investors will do so with Twitter.”

The reality is Twitter is a young company that has yet to be profitable, and while charting this conservative course is one way to assuage investor jitters, the fact is the company remains a significant risk. While the company has generated some good revenue opportunities, particularly with sponsored tweets and other advertising, as we noted at the beginning, those remain distinct question marks, and it’s those question marks that could leave many investors with egg on their face come IPO day.

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Written by: Matt Klassen. Follow by: RSS, Twitter, Facebook, or YouTube.

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Twitter Hits the Open Market —
November 8, 2013 at 5:33 am

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