With more than 70% debut on its initial market debut yesterday, Twitter is on lots of investors’ lips. What is interesting about this Bloomberg article relating to Twitter IPO is not so much about this tech company itself or investment trends in the tech industry, but rather what it suggests around IPO pricing. An oft comparison is made with Facebook IPO and how Facebook’s share price was nearly halved following its stock offering, whereas here Twitter has a very significant jump from its launch price. The thrust of this article is that Twitter has adopted an IPO pricing strategy so as to avoid the flop that Facebook suffered, by “leaving money on the table” and priced conservatively. This reveals how the pricing of an IPO can make all the difference for the company and the investors – “if Twitter priced the shares in its IPO at $44.90, where it closed yesterday, it would have raised an additional $1.32 billion, data compiled by Bloomberg show.” – although the investment banks that advised on the IPO declined to comment on the pricing technique.
This has probably also demonstrated that the stock markets (and investors) are far from rational. Facebook was already making a profit when it had its IPO, yet its share price flopped following listing, whereas Twitter has never made any profit and recorded loss prior to its IPO. As another article (Guardian) reported, “[Twitter] has never made a profit: in the first nine months of this year, Twitter posted a loss of $134m. Facebook, the last big tech IPO, now has over 1bn users – its profits grew to more than $1bn before it went public.”
Before anyone rushes out to buy the stock, also note this from the Bloomberg article:
“Twitter’s management and its bankers are happy with the IPO’s outcome, according to a person with direct knowledge of their thinking. While they’re not surprised the stock gained so much, because of the overhang in demand, they expect it to drop toward $30 a share during the next three weeks, this person said.” (and that at yesterday’s closing price, Twitter’s price-to-sales ratio is 22 times, whereas it is 11.2 times for Facebook)
NB: THIS DOES NOT CONSTITUTE INVESTMENT ADVICE. INVESTMENT INVOLVES RISKS, PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE PERFORMANCE. INVESTORS SHOULD FULLY UNDERSTAND THE RISKS INVOLVED IN ANY INVESTMENT AND SEEK FINANCIAL ADVICE IF IN DOUBT.