In 140 characters or less, Twitter announced to the world that they will be pursuing an IPO, exciting Twitter fans and a few investors along the way. The king of the hashtag took advantage of a clause in the newly passed JOBS Act that allows for more control over IPO launches for companies with less than $1 billion in revenue, as well as a secret process that gives connected investors an advantage over the general public. Not much is known about what a Twitter IPO would look like, except that it is currently valued around $10 billion. This would make it a valuable and enticing stock, but it shouldn’t be anywhere near the ridiculous valuation Facebook (NASDAQ:FB) had when it first launched.
However, the $10 billion question remains: How will social media start-ups do in a post-Facebook IPO world?
Learning from Facebook's mistakes
The one-year lag Facebook experienced after it first launched was an example of a popular company learning that it was only a big fish in a small pond. Facebook may be the go-to social media site for college kids, but Wall Street looks beyond the millions of photos of users wearing funny hats. What Wall Street saw was a company that was way overvalued, coupled with serious problems about raising mobile ad revenue--a big component of Facebook's business plan. As a result, Facebook's share price was sliced in half within four months of its debut, and didn't break even until this August.
Facebook was able to finally pass its IPO price because it fine-tuned how it sold ad space on News Feeds and online; this attracted advertisers while not alienating users that don't particularly want a social media site to be an ad blitz for products they may not want. That is what Twitter will have to deal with as well as it launches its IPO. Ad revenue will play big on Twitter's prospects for the future of both the company as a social media escape as well as a strong investment opportunity. Fine tuning this balance will be critical for Twitter's long-term development.
Making investors' mouths water
Fortunately for Twitter, unlike Facebook, they are already ahead of the game, similar to how business social networking site LinkedIn (NYSE:LNKD.DL) took advantage. LinkedIn's pre-IPO business model relied heavily on a strong revenue stream from businesses looking to advertise to job-seekers. Since it was a sophisticated version of Facebook, the caliber of advertising would be much higher. Not only that, it started with a very low valuation of $4.3 billion in 2011 and sold only 8% of its shares to increase demand. Now, the company's valued at $32 billion, a nine-fold increase in just two years, and increasing numbers of people are logging into the website each day.
Twitter, LinkedIn set up for the long run
This has helped to generate more social advertising revenue compared to other social networking sites. This year, social media advertising grew by 40% from last year, a percentage that is expected to drop to around 23% by 2015. At the moment, Twitter and LinkedIn are both well ahead of the average, posting a 102.2% and 46.7% change respectively, and will stay above 40% into 2015, according to eMarketer.
This can only help Twitter because they are already showing that they have a stable revenue stream in advertising, something that Facebook was unable to take advantage of when it launched its IPO. In addition, Twitter just bought the ad seller start-up MoPub, a company that allowed advertisers to bid on social ad space in real time. This should give Twitter a distinct advantage in terms of shifting advertising revenue to the site and ensuring that the advertising is directed at specific groups of people, rather than as a carpet ad that will alienate users.
The bottom line
A combination of new regulations that allow Twitter to play the field before going primetime via the JOBS Act, a valuation that is realistic given past history with social media IPOs and a revenue plan that has long-term potential make Twitter a legitimately enticing stock. Unlike Facebook, which went big and got burned, Twitter seems to be taking a cue from LinkedIn and displaying a strong revenue program plus a cunning business strategy to drive people to buy the stock. So, if you still have jitters because you bought into the Facebook hype and got burned, rest assured, the tech world learned from that experience and Twitter won't be making those same mistakes.
John McKenna has no position in any stocks mentioned. The Motley Fool recommends Facebook and LinkedIn. The Motley Fool owns shares of Facebook and LinkedIn. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.