Twitter shares continue to trade at a premium to IPO price

KEVIN PRENDERGAST
STAFF WRITER

Twitter is continuing to flourish four months after its initial public offering. Investors have pegged Twitter’s value at $30 billion as of Tuesday. Twitter was initially valued at $26 dollars a share, but quickly rose on the first day of trading publicly to $50. Some investors were skeptical that Twitter would be able to maintain its share price and valuation, but thus far they have. While this seems like a high valuation for a company that has yet to make a profit, it is hardly a surprise. Considering the fact that comparable social media giant Facebook is trading close to $70, Twitter’s price tag of $56 seems like a bargain. When one also takes into account that Internet stocks saw outrageously high yields in 2013, the aggressive price increase becomes even less surprising. Facebook, LinkedIn, Netflix, Yelp and Pandora all had big years, returning 133 percent, 123 percent, 340 percent, 256 percent, and 244 percent respectively this year alone. To put that into perspective, the S&P 500, an equity index of the largest 500 stocks, returned 30 percent in 2013.

Perhaps more significant than Twitter’s gigantic price jump is the signal it sends to tech companies that are still waiting on the sideline, still frazzled by Facebook’s horrific IPO experience. Twitter’s IPO process seems to have been a huge success and, if its stock price continues to rise, Facebook’s IPO debacle will be a distant memory. Companies like Evernote, DropBox, Snapchat and other have been given a $30.11 billion good reasons why they should consider filing to go public. Twitter’s IPO has proven that current profitability is irrelevant, and that Internet companies like these trade on pure potential. Wesley Chan, a partner at Google Ventures, reiterated that sentiment

“The Twitter IPO shows that there is an appetite for exciting consumer Web companies which may not have fully developed business fundamentals. That may prompt other similar companies to try to rush to market to take advantage of the current climate,” Chan said according to a Reuter’s article.

For now, if Twitter wants to maintain its hefty valuation it must focus on generating more revenue and becoming profitable. One major area it can improve on is its overseas revenue, which accounts for only 26 percent of its total income. This statistic becomes even more intriguing when one considers that more than 70 percent of its users are from overseas. While this may seem like an unsettling figure, it is in fact positive. Investors look at this number and see an area of significant growth potential, which has undoubtedly pushed the price of the equity up. Allistar Barr, a technology reporter at USA Today, articulated that opinion.

“When Wall Street is in a good mood, they look at something like that and they say, well, there’s a great opportunity for future revenue growth,” Barr said. “And so what Twitter really needs to do is take all those users overseas and start showing them ads in a much more efficient way and making – making a lot more revenue out of those.”

If Twitter can monetize its overseas usage and continue to expand its base, the equity should have no problem retaining its valuation. If Twitter continues to do the right things and realizes the potential profits that exist within its business model, the sky is the limit for this company.

Contact the writer:
kevin.prendergast@scranton.edu

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