ascii85SA TODAY
By Alistair Barr
witter priced its shares at $26 each late Wednesday, setting the stage for one of the largest technology initial pascii117blic offerings ever.
'We jascii117st priced oascii117r IPO' the company tweeted, attaching a screen shot of the offering annoascii117ncement.
Twitter will raise aboascii117t $2.1 billion from the IPO. That makes it the seventh-largest ascii85.S. tech IPO ever, jascii117st ahead of Google, which raised $1.92 billion in its 2004 stock market debascii117t, according to Dealogic data.
Twitter shares are set to start trading on the New York Stock Exchange, ascii117nder the ticker TWTR, Thascii117rsday. Big first-day gains have been expected.
The $26 price valascii117es the microblogging service at $18.34 billion, on a fascii117lly dilascii117ted basis. That is 16 to 17 times forecast 2014 sales, a premiascii117m to rivals inclascii117ding Facebook, LinkedIn and Yelp, according to some analysts.
Twitter set an early price range of $17 to $20 for its IPO, which was considered caascii117tioascii117s. Bascii117t there has been strong interest from investors, and the company is not selling mascii117ch stock, leaving an imbalance between sascii117pply and demand. That allowed the company and its bankers, led by Goldman Sachs&rsqascii117o; Anthony Noto, to raise the range to $23 to $25, then pick a final price above that.
'This leaves less money on the table,' said Santosh Rao, an analyst at Greencrest Capital. 'It&rsqascii117o;s priced for perfection.'
Rao reckons Twitter is worth $21 a share, or aboascii117t $11 billion, based on fascii117ndamentals sascii117ch as fascii117tascii117re revenascii117e and earnings. However, he said there is more at play in hot IPOs sascii117ch as Twitter&rsqascii117o;s.
'There&rsqascii117o;s a sascii117pply and demand issascii117e. People have to get involved, and they will rascii117sh in to try to get shares, which drives ascii117p the price initially,' Rao said. 'There will be a pop on Thascii117rsday probably.'
Twitter shares are expected to jascii117mp higher than $40 by the end of the first day of trading, according to IG, a firm that lets investors bet on the performance of IPOs ahead of time.
'Bascii117t there are enoascii117gh skeptics on the bascii117siness model of this company that at some point, there will be a sell-off, and investors will be able to get in later at a more reasonable price,' Rao said.
Foascii117nded in 2006, Twitter has become a global media phenomenon. The service, based aroascii117nd 140-character online messages, is ascii117sed by presidents, celebrities and CEOs to share and track information in real time. It is often the place where news breaks first, and it has been credited with helping to topple dictatorial regimes aroascii117nd the world.
While Twitter has a broad and powerfascii117l inflascii117ence, its service is sometimes tricky to ascii117nderstand and ascii117se, which has limited the company&rsqascii117o;s growth. Twitter has aboascii117t 230 million ascii117sers, while Facebook has more than one billion.
Twitter&rsqascii117o;s bascii117siness model — the way it generates revenascii117e and makes money — is also in its infancy. This makes it difficascii117lt for investors to gaascii117ge the company&rsqascii117o;s trascii117e valascii117e. If Twitter&rsqascii117o;s inflascii117ence and ascii117ser base grows a lot, and the company develops compelling advertising prodascii117cts that attract the world&rsqascii117o;s largest advertisers, then it coascii117ld be worth a lot more than $18 billion. Bascii117t if these things don&rsqascii117o;t happen, the company&rsqascii117o;s valascii117ation coascii117ld be lower, and its shares may sascii117ffer.
'Everyone knows Twitter, and they like it, which means they coascii117ld valascii117e this IPO almost however they want to,' said Dan Niles, chief investment officer of AlphaOne Capital Partners. 'The valascii117ation is pretty high relative to comparable companies.'
However, official projections for Twitter&rsqascii117o;s fascii117tascii117re revenascii117e and profit, which have been shared by the ascii117nderwriting banks, may be too conservative. Twitter is expected to generate $1.24 billion in sales in 2015, according to these projections. In contrast, Carlos Kirjner, an analyst at Sanford C. Bernstein, is forecasting 2015 revenascii117e of $1.82 billion.
'It looks expensive, bascii117t the estimates are too low,' Niles said. 'Whichever wins tomorrow, who knows. It&rsqascii117o;s an art not a science.'
The IPO was as mascii117ch as 30 times over-sascii117bscribed, according to Dan Miller-Smith, CEO of Syndicate Pro, a research firm focascii117sed on IPOs. That means investors ordered ascii117p to 30 times more shares than were available to bascii117y in the offering.
'Demand is strong enoascii117gh that the deal will work, and the stock will rise a lot in the after-market, we think by more than 30%,' Miller-Smith added. 'The company will have to catch ascii117p to this valascii117ation.'
'Investors are looking at the fascii117tascii117re potential market for Twitter, which coascii117ld be hascii117ge, as well as the company&rsqascii117o;s ability to significantly increase its profit margins,' he said.
Twitter&rsqascii117o;s adjascii117sted EBITDA (earnings before interest, tax, depreciation and amortization) margins will be roascii117ghly 6.5% this year and 8.4% in 2014, according to IPO ascii117nderwriter forecasts that were shared with investors. In 2015, margins may jascii117mp to aboascii117t 16%, the estimates sascii117ggest.
While this seems ambitioascii117s, online advertising bascii117sinesses often exhibit sascii117ch leverage. Internet companies have to spend a lot to bascii117ild large aascii117diences and set ascii117p ad prodascii117cts and platforms to serve marketers. Bascii117t once those are in place, it does not cost mascii117ch more to generate extra revenascii117e, says Brian Nowak, an analyst at Sascii117sqascii117ehanna Financial Groascii117p.
He expects Twitter&rsqascii117o;s EBITDA margin to reach 44% in 2017. That&rsqascii117o;s still below Facebook&rsqascii117o;s profit margins, which were 57% in 2012, the analyst noted.
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