Latepost The Twitter Ipo: Thoughts On The Ipo Cease Game

The Twitter IPO moved into its terminal phase, with the annunciation lastly calendar week of the preliminary pricing estimates per part too details of the offering. The companionship surprised many investors past times setting an offering toll of $17 to $20 per share, at the depression halt of marketplace position expectations, too pairing it with a conception to sell seventy meg shares. Having posted on my justice of Twitter’s price when the IPO was starting fourth dimension announced too next upwardly with surprised many investors past times setting an offering toll of $17 to $20 per share, at the depression halt of marketplace position expectations, too pairing it with a conception to sell seventy meg shares. Having posted on my justice of value, when the companionship filed its prospectus (S-1) with Twitter, I idea it would brand feel to both update my valuation, with the novel data that has emerged since, too to endeavour to brand feel of the pricing game that Twitter too its bankers are playing.

Updated valuation

In my original valuation of Twitter, merely over a calendar month ago, I used the Twitter's initial S-1 filing which contained data through the starting fourth dimension ii quarters of 2013 (ending June 30, 2013) too the crude oil details of what investors expected the IPO proceeds to be. Since then, Twitter has released iii amended filings with the most recent one containing 3rd quarter operating details too part numbers that reverberate changes since June 30. Incorporating the data inwards this filing equally good equally the offering details contained inwards the study leads me to a (mostly minor) reassessment of my justice of Twitter’s value.

Operating Results: Twitter’s 3rd quarter study contained both goodness intelligence too bad news. The goodness intelligence was that revenue growth continued to accelerate, with revenues to a greater extent than than doubling relative to revenues inwards the same quarter inwards 2012, but it was accompanied past times losses, which also surged. The tabular array below compares the trailing 12-month values of cardinal operating metrics from June 2013 (that I used inwards my prior valuation) with the updated values using the September 2013 reports:

As with prior periods, the R&D expense was a major argue for the reported losses too capitalizing that value does brand the companionship real mildly profitable. Note that piece the numbers have got shifted significantly, in that location is picayune inwards the study that would Pb me to reassess my narrative for the company: it remains a immature companionship with pregnant growth potential inwards a competitive market. Consequently, my targeted revenues inwards 2023 ($11.2 billion) too the operating margin estimates (25%) for the companionship rest about my initial estimates (October 5).

IPO proceeds: In the most recent filing, the companionship announced its intent to number seventy meg shares, with the selection to increment that number past times 10.5 meg shares. In conjunction with the toll gain of $17-$20 that is also specified, that implies that the proceeds from the offering volition gain anywhere from $1.19 billion (70 meg shares at $17/share) at the depression halt to $1.61 billion (80.5 meg shares at $20/share) at the high end. In my valuation, I volition assume that the offering volition hap at the mid-range toll ($18.50) too that the selection to expand the offering volition non live utilized, leading to an expected proceeds of $1.295 billion.

Share number: As with most immature companies, the part number is a moving target equally options instruct exercised too novel shares are issued to employees too to fund acquisitions. In the tabular array below, I compare the part numbers (actual, RSU too options) from the starting fourth dimension S-1 filing with those inwards the most recent filing:

The part count has increased past times nearly 8.02 meg shares, since the lastly filing, piece in that location has been a slight drib off inwards options outstanding. (Note: The most recent filing also references 80.3 meg shares for hereafter issuance to comprehend equity incentive & ESOP plans that I have got non counted.)

The terminal valuation is contained in this spreadsheet, but it has changed picayune from my master copy estimate, with the value per part increasing to $17.84/share from my master copy justice of $17.36/share. The moving painting is below:

Reading the pricing tea leaves

Now that the companionship (and its bankers) have got announced a toll gain ($17-$20) that is about my justice of value, my ego, of course, wants me to believe that this is a testimonial to my valuation skills but I know better. There is a fairy tale scenario, where my value is right, Goldman Sachs has come upwardly up with a value real about mine too the marketplace position toll happens to reverberate that value. It is a fantasy for a uncomplicated reason. As I noted inwards my toll versus value post, the IPO procedure has picayune to do with value too everything to do with price, too given how the marketplace position is pricing other social media companies, I discovery it hard to believe that toll too value have got magically converged, with Twitter.

Accepting that the closeness of Goldman’s pricing of Twitter to my justice of value is pure coincidence frees me to intend nearly what it does state me nearly the bankers' (and the company’s) sentiment of what they run across equally a “fair price” for Twitter. If Goldman too the banking syndicate are pricing Twitter at $17-$20, I am inclined to believe that they intend that the “fair price” today is higher for the next reasons:

1. The underwriting skew: The Twitter IPO, similar most world offerings, is backed past times an underwriting guarantee from bankers that they volition deliver the agreed upon offering price. If the offering toll is pose equally good high, relative to the fair price, that creates a substantial cost to the bankers, whereas if it is pose equally good low, the cost is much smaller. Not surprisingly, IPOs tend to live underpriced, on average, past times nearly 10-15% equally I noted inwards surprised many investors past times setting an offering toll of $17 to $20 per share, at the depression halt of marketplace position expectations, too pairing it with a conception to sell seventy meg shares. Having posted on this prior post.
2. The PR twist: There is a world relations too marketing cistron to what happens on the offering appointment that cannot live nether estimated. To render a contrast, aspect at the reactions to the Facebook too Linkedin offerings inwards both the immediate aftermath of too inwards the weeks after the offering. While both IPOs were mispriced past times the same Pb banker (Morgan Stanley), with Facebook beingness over priced too Linkedin beingness nether priced, Morgan Stanley was bashed for doing the erstwhile too emerged relatively unscathed from the latter. In the months after the offering, Facebook saw its shares lose to a greater extent than ground, equally institutional investors abandoned it, piece LinkedIn shares were carried higher, at to the lowest degree partly because of the opening 24-hour interval momentum. 
3. The feedback loop: I know that the bankers have got been testing out the degree of enthusiasm alongside investors for the Twitter offering too I discovery it hard to believe that they are non incorporating that into their pricing. In other words, if they desire excitement at the route show, it volition come upwardly from investors thinking that they are getting a instruct by too non from beingness offered a fair deal.

My completely uninformed guess is that the bankers intend that Twitter’s fair toll is closer to $25/share too that they have got pose the gain at roughly 20% below those estimates. If the offering goes equally choreographed, hither is how it should unfold.

1. The route exhibit volition live good received too the bankers volition denote (reluctantly) that the high enthusiasm shown past times investors has pushed them to pose the offering toll at $20/share. 
2. Institutional investors volition start lining upwardly for their preferred allotments at that offering toll too the enthusiasm bubble volition grow.
3. On the offering date, the stock volition jump nearly 20%-25%, leading to headlines the adjacent 24-hour interval nearly the riches endowed on those who were lucky or privileged plenty to instruct the shares inwards the offering.
4. Some of the residuum of us, who were non lucky or privileged plenty to live part of the offering, volition live drawn past times these intelligence stories into the stock, pushing the toll higher, too keeping the momentum game going. 
5. In a few months or perchance a year, some of the owners of Twitter (big investors too venture capitalists) volition live able to sell their shares too cash out. 

So, what tin sack become incorrect with this script? The biggest instrumentalist inwards this play is Mr. Market, a notoriously moody, unpredictable too perchance bipolar (though that may require a clinical judgment) character. As was the illustration inwards Facebook, a lastly infinitesimal tantrum past times Mr. Market tin sack lay waste materials the best pose plans of banks too analysts. 

Winners too Losers

Some of you lot may accept number with my cynical sentiment of the IPO process, arguing that this is non a play or a game too that in that location are existent winners too losers inwards the process. While this is to a greater extent than oftentimes than non truthful for whatever investing process, who are the losers inwards this process? By nether pricing IPOs, the existing owners of the companionship going world are leaving money on the table. In the aftermath of the Linkedin offering, where surprised many investors past times setting an offering toll of $17 to $20 per share, at the depression halt of marketplace position expectations, too pairing it with a conception to sell seventy meg shares. Having posted on  had been scammed past times bankers. Before you lot experience equally good sad for Evan Williams too the venture capitalists, who are the primary owners of Twitter, you lot should accept into trouble concern human relationship ii facts:

1. Only a little fraction of the equity is beingness offered to Blue Planet on the offering date: If all of Twitter beingness offered for sale on the offering date, an underpricing of 20% (selling the shares at $20, when the fair toll is $25) would cost investors almost $3 billion inwards value (since the companionship would live priced at $12 billion instead of $15 billion). However, equally noted earlier, only $1.2 to $1.6 billion volition live offered to investors inwards the IPP. Even if you lot accept the upper halt of this amount ($1.6 billion), a 20% nether pricing would interpret into a loss of $400 meg to the owners. While that may live a lot of money to most of us, it would move out to nearly 3% of overall value for the existing owners.
2. The existing investors inwards Twitter are neither babes inwards the woods nor naïve fools: The electrical flow owners inwards Twitter are a who's who of venture working capital missive of the alphabet investing, only capable of watching out for their ain interests too merely equally probable to exercise bankers equally they are to live used past times them. Rather than beingness victims hither of the nether pricing, they are willing accomplices inwards this pricing process, who sentiment the loss on the opening 24-hour interval equally a little cost to pay for a to a greater extent than lucrative afterward exit.

There are some winners, though none of them emerge unscathed from the process. The starting fourth dimension are the bankers, who past times nether pricing the offering enough, homecoming the underwriting guarantee moot too instruct paid for it anyway. Here again, though, issuers are non only helpless too Twitter managed to instruct a discount on the underwriting fees. The 2d are those investors who are allotted shares at the offering price, many of whom are preferred clientele for the banks. They to a greater extent than oftentimes than non tend to live wealthier investors (institutions too individuals) who convey inwards revenues inwards other ways to the banks (as private banking clients or through trading). Since banks are non altruistic, I am non certain that these preferred clients halt upwardly with a instruct by if you lot count the other fees they fork out to banks. The 3rd is the financial media (and that includes bloggers) that tin sack exercise the IPO equally grist for the mill, churning out endless stories (and weblog posts) nearly the IPO.

Cut out the bankers?

If you lot purchase into my cynical sentiment of the Twitter IPO, it does brand the whole procedure seem similar a charade too raises questions nearly whether it is needed. What if nosotros could skip the bankers, the offering price, the route shows too the endless fence nearly what volition hap on the offering appointment too merely become straight to the offering?  It is truthful that bankers play other roles inwards the procedure that may live hard to supersede inwards some IPOs, but I am non certain that tin sack live said nearly their purpose inwards Twitter.

	Banker's role	The Twitter IPO
Credibility	If investors have got never heard off or know picayune nearly a company, the banker may render credibility to the companionship with investors.	Not only is Twitter equally recognized a cry equally Goldman Sachs, it may have got to a greater extent than credibility with investors.
Pricing	Bankers tin sack toll the stock, non only past times looking at what the marketplace position is paying for similar stocks, but also past times testing the toll with investors.	Since the stock has had VC transactions equally good equally acquisitions where the stock has been effectively priced, the banker has less move to do.
Selling	Use their sales forces too route shows to instruct investors interested inwards the stock too excited nearly the offering.	The sector is already "buzzed" too if you lot pose the toll at 25% below the “fair” price, you lot don’t actually have got to sell it real much.
Post-offering toll support	In the months after the offering, the bankers may measuring inwards too render  price back upwardly inwards the confront of selling.	With a $12 billion company, banks don’t have got the working capital missive of the alphabet or deep pockets to render to a greater extent than than surface support.
Corporate Finance advice	Guide the companionship inwards financing & dividend policy too inwards interactions with markets.	Bankers know picayune nearly running social media businesses, which don't exercise much debt too have got no cash to pay dividends/ purchase dorsum stock.

Looking at the facts, I intend that Twitter could have got saved itself some money too fourth dimension if it had followed Google too surprised many investors past times setting an offering toll of $17 to $20 per share, at the depression halt of marketplace position expectations, too pairing it with a conception to sell seventy meg shares. Having posted on suggestions inwards this post. 

Wait until the offering appointment too play the momentum game: The trading game begins on opening 24-hour interval too stocks similar Twitter are a momentum investors' dream (and nightmare) equally prices are moved upwardly too brought downward past times wisps of data too mood changes. If you lot are goodness at this game, you lot tin sack play it for profit, equally long equally you lot do non allow delusions of beingness an investor brand it the way.

Buy the stock equally a long term investor: I do non have got a  deep rooted aversion to buying immature or money losing companies, if the toll is right. Given my justice of value ($18/share), the stock would be, at best, a fair value at the offering toll too I tin sack intend of far less ulcer-inducing investments that earn their fair value. That does non hateful that Twitter volition never live on my radar. If the momentum game turns against the stock too the toll drops to $10/share, I volition live create to buy.

Entertainment/ educational value: I am enjoying too volition croak on to relish every minute of this IPO for sheer amusement value, equally I psyche to analysts brand hilariously sick conceived arguments for or against the stock too portfolio managers human activity equally if they are making reasoned judgments nearly value piece desperately checking out momentum indicators. This is the ultimate reality exhibit too I am merely waiting for Ashton Kutcher, Kanye West too Lady Gaga to exhibit upwardly equally Twitter IPO experts on CNBC.

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