Going Cheep?

The shares of microblogging firm Twitter may not be the bargain investors are hoping for.

Twitter is already a social-media star. Now it hopes to become the toast of the stock market too. The firm has gradually been unveiling more information about its business. But as it gets ready for its first day of trading as a public company on the New York Stock Exchange, which looks likely to be on November 7, opinions about a fair price for the shares vary considerably.

The firm has announced a provisional range of between $17 and $20 for its stock, which would value it at up to $11.1 billion. Speculation is rife that Twitter and its bankers could set an even loftier price before trading starts, though as we went to press no change had been announced. If they do push the price higher, long-term investors could get their fingers burned.

Twitbulls point out that Twitter is going public at a time when social-media stocks are all the rage. On October 30,  Facebook’s share price, which had already risen by 84 percent this year, soared in after-hours trading following news that its latest quarterly revenue had hit $2 billion. LinkedIn has seen its stellar revenue growth slow a bit recently, but its shares are still up 95 percent this year.

Twitter’s boosters also claim that the company deliberately set a conservative initial price range to fuel investor interest in its stock, noting that an internal valuation conducted by the firm in August reckoned its shares were worth $20.62 each at the time. The company has continued to increase its audience, and now boasts 232 million users that visit it at least once a month.

twitter PSR chart

Small wonder, then, that some financial folk are predicting Twitter’s stock will fly even if the IPO price is a bit higher than the existing range. Brian Wieser of Pivotal Research Group reckons its shares will be changing hands at $29 by the end of the year. Others are even more optimistic. Doug Kass of Seabreeze Partners Management, a hedge fund, has said he thinks the share price of Twitter could double within its first month of trading and that he would be willing to pay up to $32.50 for its shares. Twitbulls like to point out that Twitter is currently generating about $2.30 of revenue per user. That is much less than Facebook makes from its audience, implying Twitter has plenty of room to boost sales.

But they gloss over an important fact. Unlike Facebook and LinkedIn, which were making healthy profits before they went public, Twitter is still losing money — $134 million in the first nine months of this year compared with $71 million in the same period of 2012. These losses make it impossible to compare Twitter’s IPO with others using the traditional yardstick of a price-earnings ratio.

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