5 Things Investors Can Learn About Twitter From The Facebook And LinkedIn IPOs

With Twitter’s upcoming IPO, social media and finance pundits are getting together to make their bets on the future of the micro-blogging service. The world of social media IPOs is still the Wild West, and with only a few major examples to study, we thought we’d look at 5 things investors can learn from the LinkedIn and Facebook IPOs before Twitter goes public.

1. How is their evaluation?

A misguided evaluation can cause trouble with the stock. With Facebook, an overpriced stock target caused banks to jump in to keep the price high on the IPO day, and this was part of the reason the stock went into a slow deflation after the IPO.

Twitter has been reported to have actually undervalued their stock at around $17-$20 with 70 million shares outstanding putting the market capitalization at $1.4 billion at an overall valuation of $11B.

Most reports put the company’s overall valuation much higher, with some reporting a market value of around $26. This low evaluation means there may be room for the stock to be driven up on IPO day, and general sentiment is that Twitter has made a smart move in this area.

2. Facebook apps vs Twitter apps

Facebook suffered criticism shortly after its IPO because people saw Mark Zuckerberg as clamping down on the freedom of app developers. Facebook limited their control over their own applications and ended up ostracizing many of the people that had made Facebook a thriving app economy in the first place.

Twitter, on the other hand, is about to begin a plan to help application developers build apps “within a tweet”.

Investors should be sure to look this up to understand Twitter’s future potential and stock price. If Twitter is able to successfully nurture an app ecosystem on its platform the revenue potential is huge: Facebook used to take 30% of all revenue earned on its apps, Twitter may do the same. Always remember that while Zynga has since faded away, Zynga earned $1.2 Billion in 2012. Will we see a Zynga sprout up on Twitter’s platform?

3. Consider market conditions

You can’t simply look at an IPO in a vacuum. LinkedIn had a very successful IPO based on its loyal userbase and savvy CEO, but it also benefited from great market conditions. A few months after the IPO there was a market sell-off which caused other IPOs to suffer.

We’re currently in a very uncertain economic situation and while Twitter is certainly a hot IPO, it’s important to review the current market condition with a professional (or get a few opinions) first.

4. Future revenue forecasts

When Facebook went public, it had an astronomical valuation based on its current revenue forecasts and growth potential. According to Businessweek:

Twitter may be seeking to avoid the hype that led to Facebook pricing its offering at 107 times trailing 12-month earnings, more expensive than 99 percent of all companies in the Standard & Poor’s 500 Index at the time.

So what are the future growth potentials for Twitter? Pundits are split on whether the company will be able to grow its advertising revenue, but in the first few years of the company revenue growth has been steady.

5. Hope the New York Stock Exchange stands up

When Facebook went public, the sheer volume of activity caused the Nasdaq to face technical difficulty so severe that traders voted “no confidence” and the entire exchange had to be shut down. This was an absolute disaster for traders who like to keep their precious cash as far away from risk and unpredictability as possible.

Fortunately, the New York Stock Exchange ran a test specifically for Twitter so that the same thing wouldn’t happen again. But is this just a show to cool investor worries or will the New York Stock Exchange be able to hold up during one of the year’s most anticipated IPOs?

Will you be investing in Twitter on IPO day? Let us know in the comments!

(Stock market image via Shutterstock)