The Twitter Rollout By: Gabriel PotterMBA, AIFA® 2013.11.13

Initial Public Offerings, IPOs, are a fascinating business.  For those of you watching social media or finance, there was big news on Friday:  Twitter became a public stock for the first time.  Market research analyst PrivCo reports that 1600 new millionaires were minted as the private owners – insiders and other employees – watched their ownership stake in the company emerge as a quantifiable value and then skyrocket.

In this case, the valuation partners crunched the numbers and determined that the company was worth $26 dollars a share – which works out to a market capitalization of $11 billion.  By some respects, this valuation is ridiculous.  Like other tech company IPOs in the late 1990’s, the company has never turned a profit and earned less than $0.5 billion dollars last year.  Using the common Price / Earning comparison, that means the company’s initial P/E ratio was priced well above 20, causing some market commentators to balk at its rich valuation.  In heavy trading, the Twitter IPO was a grand slam; at the time of this writing, Twitter is trading at $42 a share – implying a market capitalization of about $20 billion. 

$20 billion dollars is bigger than technology (and cookware) company, Corning Glass.  $20 Billion dollars is larger than the west coast energy utility, Pacific Gas & Electric.  $20 billion is bigger than financial industry stalwart, T. Rowe Price.  All this for a company that didn’t even exist a decade ago. 

In an instant, the dreams and aspirations of a company are judged by the collective wisdom of the markets and found wanting – or a bargain.  Technology companies, by virtue of their relatively low overhead (i.e. – they don’t need huge plants, property or equipment or substantial employee base), small data set (i.e. – these are young companies), and assertive presumptions of future revenue are often the most volatile IPOs.  In the dot-com era, the market was willing to pay a high premium for the first-mover advantage, presuming that technology firms that were willing to aggressively stake out a claim for a high volume of users, despite a lack of profitability.  Now, the market is paying a premium for companies with a high quality of information about their users:  twitter #hashtags and Facebook profiles are clearly a dream for targeted advertisers.  However, only time will tell if the low barriers to entry for competitors will undermine these optimistic presumptions.  The constant battle for eyeballs fought between social-media titans Google+, Facebook, Instagram, MySpace and a thousand other upstart innovators with a great idea is still young.  The fight is going to be messy but at least it will be fun to watch. 

Gabriel Potter

Gabriel is a Senior Investment Research Associate at Westminster Consulting, where he is responsible for designing strategic asset allocations and conducts proprietary market research.

An avid writer, Gabriel manages the firm’s blog and has been published in the Journal of Compensation and Benefits,...

More about Gabriel Potter
Sign up for our Newsletter
Sign up for our Newsletter