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.