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Twitter’s Valuation Seen Exceeding US$20 Billion After IPO
Perspective | 11 October 2013

Twitter’s user growth is slowing and it shows no sign of turning a profit. Some fund managers say that is not going to stop the microblogging service’s US$12.8 billion valuation from treading higher. Much higher.

The US$12.8 billion figure is derived from the fair value that Twitter put on its shares in an initial public offering (IPO) filing. Ironfire Capital and Gamco Investors project the San Francisco-based could be worth US$15 billion to US$20 billion once it begins trading.

Those targets are fuelled by the firms’ expectations that Twitter can increase revenue at a rapid clip, as it expands globally and draws advertising dollars from companies seeking access to its more than 200 million monthly active users. Twitter has more than doubled revenue annually as companies advertise on the service, the filing showed.

“The valuation is fair despite the lack of quantifiable profit,” said Jeffrey Sica, who helps oversee more than US$1 billion of assets as the president of Sica Wealth Management in Morristown, New Jersey. “I anticipate the revenue to grow exponentially as retailers and media begin to explore ways to attract new customers through the use of Twitter.”

Sica, who said Twitter may fetch a valuation of as high as US$40 billion when it starts trading, will consider buying the stock. He would not buy if the offering is “over-hyped” and the valuation rises above US$30 billion.

Twitter, which has not set a price range or said exactly when it expects to debut, declined to comment, according to Jim Prosser, a spokesman.

Buying Expectations
In the offering prospectus, Twitter pegged the fair value of its common stock at US$20.62 a share as of August. There are 620 million shares outstanding, according to people with knowledge of the matter, who asked not to be named because the number was not included in the filing.

At US$12.8 billion, Twitter would be valued at 28.6 times revenue of about US$448 million over the past 12 months. Facebook trades at close to 20 times sales while LinkedIn Corporation fetches about 21 times sales.

“The valuation is pretty full,” said David Joy, Boston-based chief market strategist at Ameriprise Financial, which manages and administers US$703 billion in assets. “So what you’re buying is the expectation that they’re going to grow into that valuation.”

Mobile Users
Users who access the service from mobile devices are also critical to that growth. About 75 percent of Twitter’s most active users accessed the service from handheld devices in the three months through June, up from 66 percent a year earlier, the company said. More than 65 percent of advertising revenue comes from those devices.

The ability to make money from mobile users was a big factor in Facebook’s post-IPO slump last year. The shares fell more than 50 percent from their US$38 debut price in May 2012 and did not cross back above that level until July of this year – after the company reported an increase in mobile advertising.

Twitter “being a far more mobile-centric business and further along than Facebook was at their IPO is confidence- inducing,” said Michael Scanlon, managing director at Manulife Asset Management, who helps manage US$3 billion. The US$12.8 billion valuation is not outrageous, he said.

Facebook said in July that it generated 41 percent of its ad revenue from mobile promotions in the latest quarter, up from 14 percent a year earlier.

Surging Value
Far from a Facebook-like experience, Twitter’s value will surge when the shares begin to trade, said Eric Jackson, founder of Ironfire Capital, a Naples, Florida-based hedge fund.

The valuation may immediately reach US$15 billion, and “in a few years, I expect Twitter to be a US$40 billion to US$60 billion company,” he said. Lawrence Haverty, a portfolio manager at Rye, New York-based Gamco Investors, which oversees US$40 billion, said the company could be valued at more than US$20 billion on its first trade.

Jackson says he will invest in the IPO if the valuation stays below US$15 billion. Haverty said he may buy shares, depending on the market at the time of the offering and his impressions after a meeting with management.

As Twitter embarks on a roadshow to promote the deal, it will be testing investors who have been burned in recent years by the offerings of Internet companies such as Facebook, Groupon and Zynga. Groupon and Zynga also lost half their value in the months following their offerings.

“The attractiveness about some of these offerings has been mixed,” Ameriprise Financial’s Joy said. “Investors will be a little more circumspect.”

Blank Check
Technology companies, including Facebook and Google, often rely on dual-class stock structures to keep their founders and management in control. While Twitter has one class of stock, a “blank check” provision in the filing enables the board to issue preferred shares without stockholder approval.

“It sounds like there is a real possibility of a dilutive future offering,” Joy said. “All else being equal, that makes an investment less attractive.”

Two other factors weighing on Twitter’s appeal are slowing growth in new users, and the fact that it remains unprofitable despite surging sales. Average monthly active user growth slowed to 44 percent in the three months to June 30 from 78 percent in the year prior. Expenses jumped 87 percent in the first six months of 2013, led mostly by research and development costs, compared with the same period last year.

Joy predicts that Twitter may trade lower, though that depends on where the company and its investment bankers choose to price the sale – something that would not be determined until after investor meetings. While his instinct is that investors should not buy Twitter shares immediately, Joy says its long-run potential may still be strong.

“Although user growth has slowed, it’s a big world with lots of potential,” he said. “The stock is not coming cheap but could be interesting if it has the playing field.”

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