Fear, Loathing, and the Twitter IPO

Let's kill a few myths here:

First,Twitter and Facebook  (NASDAQ: FB  ) have almost nothing in common except the words "social media." They don't do the same things, they don't have the same markets, and their business models are poles apart.

Second, Facebook floated as a combination of holdings and business assets with capital requirements for expansion also factored in. Twitter is floating as a basic core business requirement to get capital for expansion and necessary evolution.

Third, the market still tends to misread just about everything about Facebook, trying to report its issues like it was a car distributor with recall issues whenever it has problems. That's not how social media companies work, but it's a core component of the almost superstitious response to the Twitter IPO.

The Twitter IPO prospectus
Twitter, obviously well advised, has made a point of lodging an SEC filing which couldn't possibly be clearer about its IPO's objectives and risks.

The entire document looks designed to damp down the sort of nutty hype that did so much damage to Facebook's stock price after it launched. The business logic is simple: Twitter does not need a flop with this IPO. It's too important to the company.

The Twitter filing sets out a very broad range of aspirations, all of which make good sense:

There are three categories of growth targets and related objectives:

  • Users- Geographic expansion, mobile applications, and product development.
  • Platform Partners- Growing the Twitter platform "to integrate more content" and partnering with traditional media.
  • Advertisers- Targeting, more advertisers, and new ad formats.

These are high-maintenance options involving developments and costs the current Twitter revenue base can't handle, hence the need to raise capital.

Twitter has also been very upfront about risks. Pages 15 to 47 of the prospectus outline all the issues the company faces, including intellectual property issues, revenue risks, competition, and more. This is a very well laid-out, virtual "How To" manual of writing stock risk assessments, but it's a matter of opinion, whether the market will understand those issues.

The bottom line for investors
The simple fact is that the Twitter IPO is an investment in a company which is already in the major league but doesn't have the major-league capital it needs. The IPO isn't even presented as a get-rich quick scheme. There are obvious potential upsides in trading values, but this really isn't a casino stock where you might win on the first roll of the dice.

The market, for once in its brief attention span, might like to focus on business realities and investment values. If this IPO goes haywire, it definitely won't be because Twitter over-hyped itself. The Twitter IPO is all about capital management, not gambling. Twitter has a new business model to create, and this is the money that will fund that work.

Get that straight, and you might just make a good investment on realistic terms. Forget the speculation, focus on the facts.

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