Twitter
Inc could face volatile trade in its debut Thursday on the New York
Stock Exchange, analysts said, but they remained enthusiastic after the
money-losing social media company priced its IPO above the expected
range.
The microblogging
network priced 70 million shares at $26 on Wednesday evening, above the
targeted range of $23 to $25, which had been raised once before. The
IPO
values Twitter at $14.1 billion, with the potential to reach $14.4
billion if underwriters exercise an over-allotment option.
If
the full overallotment is exercised, as expected, Twitter could raise
$2.1 billion, making it the second largest Internet offering in the U.S.
behind Facebook's $16 billion IPO last year and ahead of Google Inc's
2004 IPO, according to Thomson Reuters data.
The
focus now turns to the first day of trading, with some analysts
expecting a small price pop. Even with the share price increase, Twitter
has approached its offering more cautiously than Facebook, which raised
both the price and the number of shares offered before its IPO only to
see the price fall substantially at the outset.
Twelve-month price targets on Twitter's stock range from $29 to $54.
Brian
Wieser, an analyst at Pivotal Research Group who valued Twitter this
week at $29 a share, said the stock appears to have strong institutional
investor support and could easily close over $30 a share on its first
day.
But he warned that
trading could be volatile, given that
Wall Street has struggled to value
an unorthodox social media company with a newfangled business model.
"There's
still so much uncertainty and it's so difficult to even identify how
big the opportunity is," Wieser said. "Twitter will make Netflix look
like General Electric as a bellwether of stability."
Twitter
boasts 230 million global users, including heads of state and
celebrities, but it lost $65 million in its most recent quarter and
questions remain about long-term prospects.
It
also lacks the ubiquity of Facebook or the "stickiness" factor that
keeps people checking the No. 1 social network on a daily basis. A
Reuters-Ipsos poll last month showed that 36 percent of people who
signed up for a Twitter account say they do not use it.
Moshe
Cohen, a professor at Columbia Business School in New York, said
pressure on the company could quickly mount if shares lose steam out of
the gate. "Twitter, as a
company with no expectations of making profits for several years, needs
its investors to have faith," Cohen said. "If that stock starts to show
some negative momentum from the beginning, it could last for a while."
Twitter,
however, is listing amid the strongest market for U.S. IPOs since 2007,
with equity markets soaring and uncertainty around the U.S. debt
ceiling subsiding at least temporarily.
A
number of recent IPOs have doubled on their first day of trading,
including Container Store Group, restaurant chain Potbelly Corp and
software company Benefitfocus Inc.
Twitter
hiked its target IPO price on Monday from an initial range of $17 to
$20. All of the proceeds from the IPO will go directly to the company,
with no insider selling taking place.
Two
sources said Twitter's underwriters will allocate roughly 20 percent of
the offered shares to retail investors, while the vast majority of the
remaining shares will go to large, "long-only" funds.
Goldman
Sachs Group Inc, which beat arch-rival
Morgan Stanley in gaining the
lead position on the Twitter IPO, tops the list of U.S. technology
bookrunners this year with an 18.3 percent market share, up from 11
percent a year ago when it ranked fifth, according to Thomson Reuters
data.
Morgan Stanley and JPMorgan Chase & Co also led the IPO.
AVOIDING FACEBOOK'S MISTAKES
Twitter
has focused on avoiding many of the pitfalls that plagued Facebook
during its $16 billion IPO last May. The company priced shares more
conservatively than Facebook did and listed on the New York Stock
Exchange rather than the
Nasdaq.
Trading
glitches and the increase in both the price and number of shares in the
Facebook offering contributed to a sustained decline from the $38 IPO
price, with the shares taking more than a year to recover.
The
high level of interest stoked by Twitter's road show spurred
speculation in recent days that its bankers could raise the price again
significantly higher than $25, but they ultimately did not.
"I'm
glad they didn't take it up higher, as speculated," said Suntrust
Robinson Humphries analyst Robert Peck. "It still provides enough upside
for investors and provides a nice contrast to Facebook."
CHALLENGES REMAIN
Despite
Twitter's massive valuation, some analysts have expressed concerns
about whether it can sustain user growth and continue to ramp up
advertising sales at a rapid clip.
Twitter,
which has extensively courted large brands, still generates relatively
little revenue per user compared with Facebook, while the majority of
its users are located outside the United States in countries such as
Indonesia or
Brazil, which are less lucrative digital advertising markets.
During
its road show over the past week, Twitter executives assured investors
that the company could wring more money out of international users and
smaller businesses by opening offices abroad and expanding its
self-serve advertising products.
"Twitter
has clear similarities to Google, Facebook and LinkedIn, but we would
argue that Twitter exceeds these alternatives on the basis of its
branded ad potential," Evercore Partners analysts said in a note, as
they initiated coverage with an "overweight" rating and a price target
of $43.
"The distinction
in how Twitter charges advertisers stands to deliver higher than
expected ad revenues and ARPU in the years to come." Analysts, however, say the company could encounter a slew of regulatory and policy hurdles in foreign countries as it expands.
Twitter
said last month that its third-quarter revenue more than doubled to
$168.6 million, but its net loss widened to $64.6 million from $21.6
million a year earlier as costs ballooned.
Twitter's
expenditures will likely continue to rise as it expands its
international presence and continues to invest in infrastructure and
acquisitions.
Twitter's
well-known intellectual property vulnerabilities could also force the
company to invest heavily to expand its patent portfolio, as Facebook
has done since going public. Twitter
disclosed Monday that it had received a letter from International
Business Machines Corp accusing the social media company of infringing
on at least three U.S. patents.
Twitter is set to trade on the New York Stock Exchange on under the ticker
TWTR.
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