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#Twitter Truths: Financial Modeling Leading to Valuation Case Study of Twitter, Inc.

November 19, 2013
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Share Price – A balloon waiting to burst: Rationale & the Hype behind Twitter’s IPO

Twitter, Inc (“Twitter” or the “Company”) surreptitiously filed its Form S – 1 recently with Securities and Exchange Commission, USA for an IPO and finally launched its IPO in the month of November 2013. The Company filed secret paperwork for its IPO, under a new law called the Jumpstart Our Business Start-ups (JOBS) Act, which lets companies with less than $1 billion in revenue keep their finances hidden from the public until not long before they start pitching their IPO. This meant that public won't know anything about Twitter's finances (aside from the fact that it makes less than $1 billion in revenue, which all concerned pretty much already knew) until three weeks before the company started its "road show" to pitch the stock to potential investors. Twitter was launched in 2006 as a way to circulate text messages amongst user groups. However, it quickly expanded beyond the California tech centre to become a global phenomenon. From students to teenagers to celebrities to world political leaders - all exchanging messages via the web, smartphone apps, and SMS messages across the globe.

While companies across the globe shout at the top of their voices the time they decide to go public; Twitter, just following its inner core, simply tweeted:

#Twitter Valuation Financial Modeling

Have you ever wondered why Twitter chose this point of time to go public?

Even we are not sure but let’s try making some intelligent guesses. And we can think of following reasons:

1. Revival of the primary markets in USA

U.S. stock gains have led to an overall revival in the IPO markets. New issues are likely to be highest in this year since 2007. There had already been 131 IPOs this year in comparison to 128 in total in the entire year 2012. Around 118 IPOs are still in pipeline. It’s a sharp recovery after the global recession and slower than expected recovery across the globe. The market appears to be ready. An unsaid rule is “A company doesn’t go public when it has to, but when it can”. Merchant bankers appear to be confident in the current ability of the market to absorb big IPOs, especially in the social web field, which has never been so hot.

#Twitter Valuation Financial Modeling

2. Internet stocks had been on path of recovery for a significant part of this year. They have gained traction and some of them have even gained in proximity or excess of 20% only in 6 months’ time. This might have given enough confidence to Twitter for knocking at the doors of public.


#Twitter Valuation Financial Modeling

3. Funding from VC and PE players started pouring in the Company within a year of its inception.

There had been multiple rounds of funding and the investors probably are now looking for an exit. IPO right now makes sense because nothing can be better than this point of time for technology and social media stocks. Facebook cleared all its previous highs and achieved new one this month so and so that all those who invested blindly into its IPO are trading in green zone. LinkedIn ($LNKD) raised a billion dollars in a secondary offering and its stock did not even blink.

#Twitter Valuation Financial Modeling

4. 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.

5. Twitter had been quite active on the inorganic growth route.

It had made massive acquisitions in the past. Twitter has spent over $640M in acquisitions since it was founded. And nearly all acquisitions qualify to be a strategic fit. The underlying trend for almost all of their recent acquisitions are mobile and TV. Twitter has focused on TV ad targeting by acquiring companies like Bluefin Labs and Trendrr focus on TV ad analytics as Twitter aims to take market share from traditional TV ads. It’s highly expected that Twitter to continue to move on this path and will need money for their strategic acquisitions. Last year, they wanted to buy Instagram and were ready to pay $ 700 mn but Facebook outbid them with $ 1 bn.

#Twitter Valuation Financial Modeling 

Well, why did Twitter file for the IPO so silently?

Probably because of following reasons:

1. The Company was probably looking to avoid the mistakes of Facebook’s IPO disaster. The silent move allowed Twitter to keep all financial data, past, present, and future, under wraps until the investor roadshow began.

Facebook’s public offering last 2012 resulted in an immediate burst of a bubble when the share prices nose-dived months after the offering. The IPO was fully priced, the number of shares offered was enormous, and additional complications were brought in by technical malfunctions during the trading.

#Twitter Financial Modeling

2. The JOBS Act, signed into law in April 2012 allows companies to file confidential prospectuses with the SEC, provided that they make it and other documents available to the public “not later than 21 days before the date on which the issuer conducts a road show.” This means one can’t actually sell stock to the public without disclosures but can definitely delay making public disclosures until a few weeks before marketing the stock. This process allows companies time to gauge potential interest before actually filing. It’s like setting up a friend of yours to enquire from the girl’s friend what would happen if you ask the girl for a date. While you still face the risk of rejection, there is an intermediary who faces the public humiliation.

Why Twitter’s IPO gathered so much hype around it?

We could gather multiple reasons behind this:

1. Mere size of the IPO was good enough to create a hype. Twitter’s IPO was the second largest in history for a US internet company, in terms of the quantum of the fund raised. Twitter’s underwriting banks exercised their option to sell an additional 10.5 million shares in the IPO, in addition to the 70 million already planned bringing Twitter’s total proceeds to $2.09 billion, more than the $1.9 billion that Google raised in 2004, though still much less than Facebook’s IPO, which raised $16 billion last year.

#Twitter Valuation Financial Modeling 

2. A modern day, tech-oriented company, darling amongst all classes of masses.

3. The Company has created a face for itself. It has a strong brand recall. It has a standing across geographies.

4. Twitter is a huge force on the Internet. After Facebook, it’s the largest U.S. social network site, with ~ 250 million active monthly users.

5. Not surprisingly, the Twitter IPO attracted considerable attention from the media, as bankers and company insiders hype the Silicon Valley success story.

To read more about Twitter Truths, just follow the link!

You can download detailed S1 Filings for Twitter from:


About the Author

Shashi is a B.Tech from Indian Institute of Technology, Delhi and an MBA from Indian Institute of Management (IIM), Ahmedabad. With over 11 years of experience, he has dabbled in Project Management, Management Consulting, Investment Banking, Mergers & Acquisitions, Corporate Finance, Strategy Formulation and Fund Raising.


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