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Twitter IPO: A Brief Analysis

March 31, 2014
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According to Forbes, Twitter’s Initial Public Offering (IPO) in November 2013 was a failure. What do you think? On its first trading day as a public company, Twitter’s stock ended up failing most investors who purchased the stock during the day and held it to the close. Moreover, Twitter is a long shot as a successful long term buy and hold.

So we have decided to figure out the “what, how, when, why” aspects of Twitter’s IPO. Maybe after this, we can figure out what makes Facebook’s IPO different. At the end of our analyses, would we be able to figure out if Twitter’s IPO was successful or Facebook’s? At the current rate, Twitter has outpaced both Facebook and LinkedIn in the post-IPO market cap. Now that Twitter stocks are increasing ($70 versus $50 on its opening day), we can say Twitter is still doing okay. Let’s see how long that lasts!

So let us now get into the brief analysis of Twitter’s IPO.

1) Rationale & the Hype behind Twitter’s IPO

Have you ever wondered why Twitter chose this point of time to go public? We can probably make some intelligent guesses and narrow it down to the few mentioned below:

  • Revival of the primary markets in USA
  • Internet stocks had been on path of recovery for a significant part of this year.
  • Funding from VC and PE players started pouring in the Company within a year of its inception.
  • With so many rounds of funding, it’s practically difficult to raise further money and even more difficult is to fetch a higher and superior valuation in private equity markets. Presence of PE and VC players amongst the investors’ base add credibility to the entire situation and sets the right background for an IPO.

Twitter had been quite active on the inorganic growth route. Well, why did Twitter file for the IPO so silently? Again, we can only make guesses to ascertain facts.

To get into the above stated facts and many more facts in greater detail, just follow the link given above.

2) Scanning  S – 1 filing in mere 30 minutes

In this blog, before we get in to the actual S – 1 filed by Twitter, Inc. (“Twitter” or the “Company”), we will first understand the following facts:

  • What is the S – 1 form?
  • Why is it required to be filed?
  • What is its prescribed format?
  • What does it contain, etc.?
  • Facts we need to know about Form S – 1:
  • What’s there for an investor in S – 1?

So before we get into greater analysis of the Twitter IPO, we need to get these concepts and notions clear. To do so, follow the link given above and read in greater detail!

3) Who becomes rich in an IPO?

When a company goes public, it brings wealth and fortune along with it. But who are these people who get a large slice of the cake of fortune?
Based on our understanding of IPOs, we can guess that the following people are benefitted greatly:

  • The founder(s) and co-founder(s) who have passionately followed just one thought, just one idea and sacrificed everything to fulfil that dream
  • Those who remain committed to the organization: CXO level people such as CEO, CFO, CTO, CSO; employees who have remained with the organization till the time their options vested and became exercisable.
  • Investors (VC or PE or Institutional investors or even individuals) who assumed the risks and stayed invested: Earlier the participation in a funding round, more likely will be the returns. Series A investors will definitely make a higher return than Series F investors provided he / she remains invested. This is not any kind of arbitrage. Just that Series A investor assumed far more risks than a Series F investor due to early entry in to the company.
  • The bankers to the issue, also known as Book Running Lead Managers, earn their fee which typically isa certain %age of fund raised.
  • The lawyers involved in drafting the legal documents related to the IPO

To understand the ‘whys’ and the ‘hows’, follow the link to the blog!

3) Identifying &Modeling Revenue Drivers of a Blockbuster Internet Venture

Twitter is a public, real-time platform where any user can create a Tweet and any user can follow other users. It does not impose restrictions on whom a usercan follow, which greatly enhances the breadth and depth of available content and allows users to discover the content they care about most. Additionally, users canbe followed by thousands or millions of other users without requiring a reciprocal relationship, which is referred to as an asymmetric follow model. This asymmetric followmodel significantly enhances the ability of the users to reach a broad audience. The public nature of Twitter’s platform allows us and others to extend the reach of Twitter content beyond its properties. Media outlets distribute Tweets beyond our properties to complement their content by making it more timely, relevant and comprehensive.

The Company derives its revenue primarily from two sources:

  • Advertising Revenue:
  • Data Licensing Revenue

To read more about how these processes work, just follow the link.

4) Road Less Travelled – Capitalization of Expenses (R & D Expenses & Operating Leases)

Consider a technology or a pharmaceutical company with significant growthpotential. To convert this growth potential into value, these firms have to invest, but theirinvestment is usually not in land, buildings or equipment but in research anddevelopment. Under the rationale that the products of research are too uncertain anddifficult to quantify, accounting standards have generally required that R&D spending beexpensed in the period in which they occur.
This blog will also cover how the following have worked in the Twitter IPO process:

  • Asset Modeling
  • Tax Modeling
  • Ratio Analysis

5) Implementing Valuation Methodologies in case of internet based ventures

  • Discounted Cash Flow Valuation

Many a times, we have seen analysts, modellers and participants of the class choosing the horizon of projections in their financial model arbitrarily. Most of the times, many of them when asked why they have made projections for “n” numbers of years, will say that the horizon period has been chosen based on their experience in the modeling. We have so far not come across any solid back up behind answer to this question.

  • Relative Valuation

At times, you might have been pressed by your clients, senior management, colleagues or others to give a quick view of the valuation of a company. There comes to our rescue another methodology of valuation called “Relative Valuation”. Relative valuation is quick and makes lesser assumptions. Selection of the peer set for relative valuation is of utmost importance.

So to understand how DCF and Relative Valuation worked in the case of Twitter, just follow the link.

Twitter is expected to generate close to $1 billion in revenue next year as its ad products continue to mature. That marks impressive growth for the company, but it doesn't mean Twitter will achieve profitability.

Multiple reports based on interviews with bankers and analysts suggest that Twitter will continue spending aggressively in 2014 to scale and compete with other major social networks. As a result, anyone waiting for Twitter to turn a profit may have to wait until 2015.

In short, the desperation behind the IPO was the entire craze for being the owner of a social media website with the idealistic view of millions of dollars in the pocket a couple of years down the line, but the realistic picture is that things don’t always turn out the way want them to be.


About the Author

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