The Twitter IPO yesterday has been one of the most hyped in the market since Facebook’s.  I’m going to try and break down a bit of what happened.  Attempted to make this post 140 characters but alas not so tweet appropriate.  The main takeaway from yesterday is that Twitter’s IPO was not the colossal failure that Facebook’s was.  We’ll get to that later in the Q&A.

So first off, what is an IPO?

IPO stands for “Inital Public Offering.”  It’s when a privately held company becomes public for the first time by being listed on a stock exchange.  Then average Joes like you and me can buy very small pieces of ownership in the company.

Wait, I thought the IPO price was $26?  Why is the “low” on Google Finance $42? 

The original IPO price is generally only available to institutional investors or insiders who buy the shares during “road shows” put on by the underwriting bank, in this case Goldman Sachs.  When the market opened on Tuesday morning, institutional trades had already been going on behind the scenes, driving up the price.  Yesterday shares opened at $45.10, up more than 70% from the original IPO price, and rose during the day.

Why does everyone keep talking about Facebook?  What happened, and why does it matter?

 As mentioned in the intro, the Facebook IPO was an absolute trainwreck.  It was one of the most hyped IPOs ever, but numbers didn’t really match the positive outlook.  It IPO-ed at $38, rose only about 1% its first day of trading, and then got dropped like a hot potato for the next few months.  It hit the high teens before finally coming back up to the mid 40s a year later.  Since Twitter is a similar social network to Facebook, there was a lot of hype around it, but also a lot of speculation that we would be dealing with another IP-Fiasc-O.

In that case, why was Twitter different than Facebook?

There are a few reasons for this, and this list is not at all exhaustive.  My 2 cents on a few differences:

  1. There was some major shadiness going on with Facebook.  Just before the IPO, the company cut estimates because of mobile ad issues, but only large institutional investors were told about the change.  Us regular investors had no idea.  On top of that, Morgan Stanley was buying shares of Facebook just to prop back up the price when it started to drop in the first day of trading.
  2. Twitter sold a lot less shares than Facebook did.  Facebook offered $16 billion in shares at $38 each versus $1.82 billion worth of Twitter at $26 each.  Basic supply and demand means less supply increases competition to get shares.
  3. NYSE vs. Nasdaq.  Nasdaq had some very annoying technical glitches on the morning of Facebook’s IPO (and I’m speaking from experience as someone who tried to trade that morning).  Twitter used the NYSE instead and it was a much more seamless opening.
  4. Twitter is at a less mature point in its lifecycle than Facebook was when it went public.  In some investor’s eyes this means there is more room for growth and expansion, and a feeling that you’re getting in at the “ground floor.”

Twitter’s IPO sounds awesome!  Should I buy it?

I am not buying any of Twitter stock right now.  I don’t think Twitter has proven itself enough yet, plus I think the stock price is expensive right now.

Personally, I’m not sold on the revenue model yet.  I get how Facebook makes money (and it’s not just ads, it’s that it knows every single detail of your life), but Twitter’s going to have to make some changes and find new revenue streams before it’s really profitable.  In fact, the company lost more than $300 million in the last three years, and it may not even see profits until 2015.

Given its negative revenue, Twitter’s price right now is expensive.  Even analysts that are positive on Twitter have price targets that are well below (15%-30%) of where shares are trading at right now.  After the first day of its IPO, shares of Twitter are valued at 45.8 times revenue.  Compare this with Facebook and LinkedIn which were at 26 and 14.5 times revenue respectively.

Market Cap (IPO Day) Today’s Market Cap Price-To-Sales Ratio (IPO Day) Forward Price-To-Sales Ratio
Twitter $24.4B $24.4B 45.8 22
Facebook $104.2B $115.5B 26 11.2
LinkedIn $8.9B $25.2B 14.5 11.7

Bottom line is you each should do your own due diligence, but I’m staying out of it for now.

If you want some more reading on IPOs check out this article from WealthFront: Behind the Scenes: The Day of a Company’s IPO.

And if you want to be jealous of more than just money, check out the cronut spread at Twitter yesterday:



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