If you're following the hoopla surrounding the next great thing -- the pending Twitter (NYSE:TWTR) IPO -- it may feel like deja vu all over again. The similarities to Facebook's (NASDAQ:FB) introduction to the market in May 2012 are eerily abundant as Twitter reprices its IPO price leading up to tomorrow's unveiling.
However, there are some notable differences that investors should consider before diving into the deep end of the Twitter pool. By now, all Fools know how the Facebook IPO went. Beyond the financial particulars lies another, less tangible consideration regarding the investment merits of Twitter's IPO.
A few specs
The recent adjustment of Twitter's IPO price from its $17-$20 per-share range to the current $23-$25 values Twitter at as much as $13.9 billion. But don't be surprised when Twitter raises that even further when its price becomes official, which is widely expected to happen late Wednesday before tomorrow's trading begins.
Twitter's $13.9 billion is nothing compared to Facebook's record IPO valuation of more than $100 billion, and there are some key differences between the two tech players. For one, Facebook was actually profitable at the time of its IPO, and was generating more than $1 billion in quarterly revenue. Twitter? With total revenue so far this year of $422 million and a net loss of nearly $134 million (and growing), it looks like it'll be some time before Twitter is in the black.
Twitter is also well behind Facebook in user numbers, and that's especially true in the all-important U.S. market. The U.S. is where 88% of Twitter's advertising revenue is generated, but through the first half of 2013 Twitter has only gained 4 million monthly active users, or MAUs, and now sits at 49 million here. Even with Facebook's much larger penetration, its MAUs grew by 5 million in the same time period, to 198 million, and now stands at 1.19 billion around the globe.
An emotional decision
Less quantifiable, but every bit as significant, is the likelihood that Twitter's 231 million total MAUs will make an investment decision based on their love of the social media phenomenon, not whether it's a financially sound opportunity. An analyst with ZT Wealth put it perfectly: "A tech IPO like Twitter with no profit is an emotional event, not a fundamental event. You either believe or you don't." Emotions and making sound investment decisions rarely go hand-in-hand.
Twitter would hardly be the only IPO in which investors got swept up in the euphoria of the moment and love of the company. Facebook could certainly be included in that list, though investors who hung in there are finally being rewarded. Not so for those unfortunate souls that jumped on the Groupon (NASDAQ:GRPN) IPO bandwagon a couple of years ago.
Everyone loved Groupon the company leading up to its IPO. Who doesn't want to save money on half-priced goods and services? But at a valuation of $12.8 billion, which came about after Groupon upped its IPO price at the last minute, along with expanding the number of shares it was offering, the company painted itself into a corner it has yet to escape. Since the IPO, Groupon has taken steps to expand its easily replicable coupon business, and that may yet pay off for shareholders. But there's no denying that investor emotion played a part in Groupon's initial overpricing, and Twitter is following the same path.
What to expect
In the near term, don't be surprised to see Twitter's initial stock price pop after tomorrow's opening bell. Twitter will probably be priced higher than $25 a share, and will likely jump even from its elevated starting price as momentum builds. But after the dust settles, investors and the market are pretty good at (eventually) focusing on what's important: revenue, profitability, and the potential for financial growth. You'd be wise to heed the IPO stories of Facebook and Groupon and take a wait-and-see approach to Twitter, because it's going to be a wild, bumpy ride.