This Twitter IPO. WTF. A giant public celebration of people getting rich on 140 characters or less?
I guess I’m supposed to suspend disbelief and join in on the nonstop media celebration along with the millions of “should you buy Twitter shares?” articles written by 20-something bloggers in pajamas who don’t even remember 2000. Yes, that is an immediate turnoff.
I am not wearing pajamas. And I was a professional technology journalist writing about nonsensical IPO after nonsensical IPO during the 2000 bubble when the technology media company I worked for, Red Herring, was on the precipice of collapse. It later collapsed. These things can go both ways, I tell you.
Twitter is a great product and I use it a lot. But the product and the company valuation are two different things. Two notes I made during the 2000 bubble: 1) Don’t pay more than a10X price/sales multiple for a tech company and 2) Never buy the IPO of a company that has never turned a profit.
What we have here is the largest celebration of the hubris and vanity of modern civilization ever, on the same day that we get a nasty stock-market reversal. A sign of the beast?
Even though the Facebook IPO was a debacle, it didn’t seem as egregious and it didn’t bother me as much. Shares in that company later came back to earth (where I bought them). I think that’s because at least Facebook was profitable. It was achieving a return on capital.
What is everybody celebrating, exactly? It’s not like Jack Dorsey kicked you a few shares when he wore noserings. In the end, it’s just a stock offering, for god’s sake. The smart money is selling shares to grandma.
After serial bubbles and burstings of 1999-2000 and 2007-2008, I thought we weren’t supposed to IPO gigantic, money-burning operations. Twitter has burned through $418 million in investor cash. It has never earned a dime, or returned a penny of capital.
At any rate, here are the details:
- 70 million shares sold at an IPO price of $26.
- Immediately popped up to $50, settled at $46 on the close
- Company is now valued around $26 billion by the market
- Price-sales ratio is about 37. The price/sales ratio of Facebook is 22, and for Google it’s 6.
Aswath Damodara, a professor of Finance at the Stern School of Business at NYU, has a great guest post on Twitter at Techcrunch. He’s run some numbers and concludes its overvalued. His valuation is $18, and here is his take:
My valuation of Twitter yields a value of $18 per share and assumes that revenues will climb to about $11.5 billion in 2023 (giving Twitter about 5 percent to 5.5 percent of the online advertising market then), that the pre-tax operating margin will increase over time to 25 percent (about 5 percent lower than Facebook but about 5 percent higher than Google) and that a dollar in additional capital invested will generate $1.50 in incremental revenues.
But that seems like sensible analysis. And as you know, we live in a non-sensible world. We have 2000 and 2008 to show for it. Markets like to gravitate toward irrationality, both on the positive and the negative side.
If you want more on Twitter, I have written another, more detailed story about the Twitter IPO for CMSwire.com