Twitter's share sale on the New York Stock Exchange made it the biggest internet company to go public after Facebook, but a relatively modest valuation looks likely to enable the company to avoid a share price crash during 2014.
Almost every web company IPO to date has fallen by approximately 50% of their initial highs six months after launch. Zynga fell by 82% of its initial highs after a few months, while Groupon fell by a staggering 92% of its initial peak after launch.
There have been exceptions such as Google, which rallied hard after launch despite the IPO launch coming at a time when web stocks were out of favour and without the cult following that Twitter and Facebook have today – Facebook shares collapsed after launch, but have recouped most of its losses and is now trading above the listing price.
The original stated price range for Twitter shares was £10–£12 per share, but institutions buying shares paid £16 per share, indicating strong demand. The offering represented 13% of the company and valued Twitter at £7bn – approximately 10 times projected 2014 revenues.
There were reports the company was seeking a valuation as high as £10bn but, at £7bn, Facebook went public for a total value of £61bn. Some analysts suggest Twitter played down the initial IPO price to specifically to avoid what happened to Facebook.
Twitter has seen steady growth since launching in 2006, despite not having yet posted a profit – it is expected to go into the black by the end of 2014. Nonetheless, it has gone from a simple messaging site to a forum where world leaders and celebrities can write to millions of followers.
More than 500 million tweets are posted every day, while documents sent to the US market regulator ahead of the flotation revealed company revenues tripled to almost £200m in 2012, but it still lost £50m. Twitter also made a loss of £42m in the first six months of 2013 on revenues of £155m.
In excess of 300 billion tweets have been sent since the launch of the service, which allows users to publish notes of 140 characters or fewer instantly. IPO documents also revealed it has 218 million monthly users.
Almost 85% of Twitter's revenue currently comes from advertising on its site. Twitter tends to charge advertisers according to the amount of interaction their content generates.
The big question is whether Twitter can they come up with bigger earnings going forward, with analysts pointing towards several new revenue streams that could grow by £60m a year in the short-term.
Clearly, with £600m coming from the IPO and another £700m sitting around in venture capital, the company is able to invest in its future.
Presently the microblogging site has three main revenue drivers – Promoted Tweets, Promoted Accounts and Promoted Trends – the ads that sit at the top of the Twitter timeline or Trends list, which are paid for by advertisers.
But potential new revenue streams may come from the advent of access to Twitter for international customers outside the US. At the moment, small and medium-sized businesses that want to advertise directly on Twitter can only do so in the US.
In addition, Twitter's six-second video app, Vine, was launched in 2013 but none of the inventory from the videos it plays to people every week has been monetised yet.
In the first half of 2013, Twitter made £20m in revenue from data licensing. Twitter lets analytics companies have access to the information coming from its user base. Twitter expects this revenue stream to grow and, in the longer term, Twitter's data could even become more lucrative than its ad operations.
Twitter announced in September the acquisition of mobile ad company MoPub. The MoPub revenues are reportedly £60m and haven’t appeared on Twitter's bottom line yet. MoPub gives Twitter the potential to give Twitter the ability to run ads on other companies' mobile apps using Twitter data.
The company also launched its TV ad-targeting product in May 2013, with the aim of enhancing the value of TV advertising by simultaneously triggering chat on Twitter. The success of this product has also yet to hit Twitter's bottom line.
Twitter’s current video ad product lets video media companies, such as TV networks, add pre-roll adverts from their sponsors to viral videos (sports highlights, etc) and promote them in tweets. This product has yet to fully hit Twitter's accounts.
So while there has been a fair amount of cynicism around the float, Twitter appears to have learned the lessons of previous tech company flotations – while ensuring revenues will continue to climb and profits may soon start to be announced.