Twitter IPO pricier than Facebook's
Loss-making microblog site forces investors to pay larger premium for promises of fast growth
Twitter is poised to price its initial public offering at a valuation that makes it more expensive than Facebook, a profitable rival with five times as many users.
Twitter boosted its IPO price on Monday to US$23 to US$25 a share, which would give the microblogging service a market capitalisation of US$13.6 billion at the top end of the range. That would value the company at 11.8 times its estimated 2014 sales, higher than the 11.4 times price-sales ratio for Facebook.
San Francisco-based Twitter was already several times oversubscribed at US$25 a share and was set for a final offering price above that, sources said.
The price increase underscores how Twitter, which had a more conservative IPO strategy than some internet peers, is starting to shed that approach. The company initially set a range that put it at a 27 per cent discount to Facebook on a price-sales basis, yet is now creating a higher bar for success by forcing prospective investors to pay an even larger premium for its promises of fast growth.
"A tech IPO like Twitter with no profit is an emotional event, not a fundamental event. You either believe or you don't," said Max Wolff, chief economist and strategist at ZT Wealth. "Above US$26, I think this thing starts to look a little dicey."
Twitter previously took steps to avoid the hype that befell the IPOs of Facebook, Groupon and Zynga. Facebook, which raised its offering price range in the run-up to its IPO in May last year, saw its shares lose more than half their value within three months of going public.
By contrast, Twitter filed its offering prospectus secretly with the US Securities and Exchange Commission, spelled out more risk factors than Facebook and picked a different lead banker. Goldman Sachs is leading Twitter's offering, while Morgan Stanley led Facebook's.
Twitter also chose to list on the New York Stock Exchange, instead of the Nasdaq Stock Market where Facebook trades. It earlier set a price range of US$17 to US$20 a share.
Still, while Facebook was profitable when it went public, Twitter lost US$64.6 million in the third quarter of this year, almost three times as much as in the same quarter last year. Analysts do not expect the company, which does not give a target for profitability, will make money until 2015.
Twitter has also been contending with slowing user growth. Its worldwide membership base, about 230 million people in September, is a fifth of the size of Facebook's more than 1 billion users.
In presentations to investors last week, chief financial officer Mike Gupta gave Twitter's case for why it is a worthwhile investment. He forecast adjusted earnings excluding interest, taxes, stock-based compensation and other measures - known as adjusted ebitda - would reach 40 per cent, up from 6 per cent in the third quarter. The company also projects gross margins to reach the high 70 per cent range, while Facebook's are in the low- to mid-70s.
For Twitter, there may be no better time to go public than this week. The company will debut on the stock market as the S&P 500 Index is near a record high and two other social-media stocks - Facebook and LinkedIn - have each more than doubled in a year.
That may help buyers overlook Twitter's losses and slowing user growth.