What Price A Twitter IPO?

Yesterday, and with much fervour, business-focused social networking site LinkedIn went public on the New York Stock Exchange and, despite some initial scepticism and the usual ‘bubble’ allegations, the launch was a resounding success.

The stock opened at $83, and after rallying to an intraday high of $122.70 closed at $94.25, up 109% from the company’s $45 pricing. This makes LinkedIn one of the few companies in the post-dotcom era to double on its first day of trading, and values the business at a heady $9 billion.

Yesterday, Facebook COO Sheryl Sandberg, speaking at the Reuters Global Technology Summit, said that a Facebook IPO was “inevitable”.

“People used to ask us if we were going to get sold. People have stopped asking that question. We’re not. No-one is buying us. We’re going public.”

Which begs the question: is Twitter next, and high how could it go?

However you want to look at it, LinkedIn’s IPO was incredible. The company sold 7.8 million shares, or 8% of the company, netting $351 million.

Let the madness begin: this values LinkedIn at 600 times its 2010 earnings of $15.4 million. Like-for-like, this would give Facebook, which earned an estimated $600 million last year, a $360 billion valuation on a similar IPO.

Facebook’s IPO has been pegged for April 2012. Many pundits see Twitter going public sometime in 2013. Already a favourite on the secondary stock market (second behind only Facebook amongst all private tech companies – LinkedIn was fourth), 35,000 Twitter shares sold for $34.50 each in March 2011 producing an implied valuation of $7.8 billion.

A study from Emarketer suggested that Twitter’s revenues from ads alone were some $45 million in 2010, and are forecast to reach $250 million for 2012, which would put them in a much stronger position than LinkedIn prior to their IPO.

Twitter themselves have forecast $111 million in net earnings for 2011. Not forgetting, of course, that despite the smoke and mirrors, Twitter’s userbase is at least twice the size of LinkedIn’s.

But it’s not all champagne and caviar. Twitter’s ‘innovative’ advertising platform has been poorly received by marketers, which might put a dampener on those 2012 revenue estimates. LinkedIn only managed a profit of $1.85 million in 2010, but Twitter continues to run at an operating loss. And even outside of ads, we’ve still yet to see any viable, long-term revenue model.

Which leaves Twitter as something of a mixed bag. On the one side you have fantastic user growth coupled with a platform and service that has rapidly integrated itself into the public consciousness and mainstream media with such gusto that, it could be argued (and with some legitimacy), has changed the world. And on the other we have management in-fighting, no realistic business model and an inability to turn a profit.

So, as with most things Twitter, putting a realistic price on a possible IPO that is still likely two years away ranges somewhere between idle speculation and guesswork. Much of this will depend on how LinkedIn performs in the months to come (some pundits are still saying it’s a medium-term buy at $100/share), and particularly the strength of Facebook’s IPO in 2012, which will inevitably be astronomically huge.

Still, two years is a long, long time on the internet, particularly in the ultra competitive, hero-to-zero social space. In early 2008 MySpace was considered the leading social networking site, boasting over 100 million users and a $12 billion valuation. By April of that same year, Myspace had lost the top spot to Facebook, who never looked back. Rupert Murdoch’s company lost $156 million in 2010, and 10 million users abandoned the network between January and February 2011 alone. Myspace now has an estimated (and falling) value of $50-200 million.

Of course, Myspace isn’t Twitter, and Twitter isn’t Facebook, and none of them are LinkedIn, which makes these comparisons always a little problematic, at least for the more socially savvy users and tech pundits. But Wall Street does tend to group these businesses under the same hat, so the initial success of LinkedIn is absolutely indicative of a desire to invest in the social space, almost like they were buying Facebook now.

Which, all things being equal, is good news for Twitter. But for their part, and come 2013, simply still being around isn’t going to be good enough. To justify the hype, and that inevitable heady valuation, they’ll need to deliver on all fronts – users, innovation, revenues and income. Twitter is a big deal now, but that won’t cut it in two years. By the time we get to their IPO, they might just need to be the biggest deal of all.

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