Twitter, Facebook And The New IPO Market

$TWTR is a week away from becoming the “hottest” IPO since its much larger cousin $FB went public in May 2012. $TWTR seems intent on not having a repeat performance of the $FB IPO debacle which was a trifecta botch job by the lead underwriter Morgan Stanley, the NASDAQ stock market and the Facebook CFO.

$FB went public at a time when the IPO market was still in the midst of a multi-decade decline and other publicly traded social media stocks had been taken to the woodshed. To say conditions were less than ideal to support a huge market valuation in an internet social media play with an enormous “float” would be an understatement. By the second trading day after the IPO $FB closed below its initial pricing and was in a downward spiral for the next six months. The real world consequence of that kind of tumble is it harms morale internally among employees, lessens the ability to retain or poach good talent, and lessens the ability to do acquisitions because of the negative perception from potential targets.

Because of the huge negativity that followed the $FB IPO and the stocks performance for over a year $TWTR is attempting to do the opposite on all fronts. The lead underwriter is Goldman Sachs and not Morgan, the home trading exchange is NYSE instead of NASDAQ, and the firm has told GS that to price shares at a level such that when they begin trading there is only one possible direction for them to go: UP!

For the most part I agree with $TWTR and its attempt to do things very differently than $FB. But I think there is one mistake being made that may come back to bite them if market conditions change in the next 6-12 months. The IPO market is much stronger now then when $FB made its debut. But more importantly social media stocks have been on fire this year as more clarity can be seen in their biz models and their ability to make significant dollars. These conditions call for $TWTR to be more aggressive in raising cash now not less. I think on balance $TWTR is probably going to price their shares 10-20% lower than where they should (around $20 instead of $22-$24). In dollar terms they will probably be leaving $200-$300 million on the table in the IPO. To offset this risk $TWTR did secure a $1bln line of credit from their underwriters but that isn’t the same as unencumbered cash in the bank.

One other thing I wanted to mention about $TWTR is that an area where it is doing extremely well is mobile advertising which accounts for roughly 50% of its revenue. This was the main impediment to $FB trading higher until last quarter as the market was skeptical of its ability to drive revenue on mobile devices. Last quarter when $FB reported that mobile ad revenue had jumped to 40% of total revenue the stock immediately moved 25% higher and is now more than 100% above where it traded prior to that fundamental shift. $TWTR’s strength in mobile would further support a more aggressive IPO price.

It is likely the market will continue to grind higher for the foreseeable future and if $TWTR meets and/or beats expectations it will be able to come back to the market in six months when its shares are trading 50%+ higher than the IPO pricing and it will raise $1.5bln+ on fewer shares issued than in the IPO (see $LNKD for a good example of this). And the money they are leaving on the table in this IPO will simply be a footnote in their storied history.

**Post coming this week similar to the one I did for the $FB IPO back in 2012.

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