- Twitter updated its IPO price in the range of $17 - $20
- Even though Twitter valuations seem modest, Twitter is expensive when compared with Google or Facebook IPO.
- Post IPO share dilution could hurt investors further.
The dotcom bubble of 1999 had left bitter memories in the minds of many technology IPO investors. However, the Google (GOOG) IPO in 2004 following the burst of the dotcom bubble was a notable exception. The stock went on to give tremendous returns to investors climbing from an IPO price of $85 to its recent rise above the $1000 mark. Google, Facebook (FB) and Twitter today are among the most popular online websites with advertising as the main revenue focus. In light of the upcoming Twitter IPO we compare the valuations of Twitter to Google and Facebook.
Benjamin Graham in his book The Intelligent Investor, called IPOs as "It's Probably Overpriced" or "Insider's Private Opportunity." We examine Twitter's forthcoming IPO to see what the fair price would be, and if it will have any special gains for insiders. Twitter recently updated its pre-IPO filing in its S-1 filing with the SEC. The filing includes Twitter's latest financials for the quarter ending September 2013 and also the details of its IPO. We compare Twitter's performance against the pre-IPO performance of Google as well as Facebook. The relative valuation comparison is based on the price to sales ratio considering the fact that Twitter is yet to break even.
Our last comparison of Twitter and Facebook showed that Twitter is currently experiencing tremendous growth. However, this time we also compare the IPO valuation of the 140 character service against the search giant Google. Twitter's two year pre-IPO revenue growth rate was 235%, a number huge in itself, but pales in comparison to the rate of 312% at which Google had grown in the two years preceding its IPO. The case of quarterly growth rates is no different. Google had grown at an average QoQ growth rate of over 40% for 8 consecutive quarters before its IPO. Twitter has just managed 26% against Facebook's even lower 15% in 8 consecutive quarters before their respective IPOs.
We now take a look at the pre-IPO last twelve months (LTM) price to sales ratio of Google and Facebook. Facebook had a higher LTM price sales ratio of 25.76 against Google's 12.31 in spite of having a lower growth rate. No wonder the stocks moved differently in the year following their IPOs. While Facebook stock plummeted by 31%, the not so loftily priced Google stock returned 161% to its investors. So what would be a reasonable price to sales ratio to be applied to Twitter's valuation?
|Twitter @ Google forward PS ratio||Twitter @ FB forward PS ratio|
|Pre-IPO Revenues (LTM)||1,868.94||4,038||534.46||534.46|
|Pre IPO Price Sales ratio (LTM)||12.31||25.76||12.31||25.76|
|2 year pre IPO revenue growth rate||312%||119%||235%||235%|
|Pre IPO 8 quarters avg. QoQ growth rate||41%||15%||26%||26%|
|One year post IPO stock gains||161.82%||-36.41%||?||?|
We now estimate the value of Twitter based on the pre-IPO growth rates and valuation multiples of Google and Facebook. Twitter had LTM revenues of $534.46 million in the last twelve months ending September 2013. Applying the Facebook LTM multiple of 25.76, we get a value of $13.77 billion. Using the conservative Google multiple of 12.31, we get a value of $6.58 billion for Twitter. It is interesting to note that Google was growing at a faster rate on a larger revenue base as compared to Twitter, and was also profitable at the time of its IPO.
Let us now examine if Twitter's IPO could be an insider's private opportunity. We would like to highlight the potential increase in the number of shares which will happen over the next three years. The table below summarizes our calculation of the total possible outstanding shares at the time of the IPO. The total number of possible outstanding shares in 2016 will be a maximum of 775.4 million shares based on the latest filing of the company. We expect Twitter to have 613.4 million outstanding shares at the time of its IPO. The post-IPO maturing options, warrants and restricted stock options (RSUs) will add up to 161.9 million shares leading to a 26.4% dilution. This does not include any additional RSUs or stock options that the company might issue, to hire key talent after October 2013.
|As of Sep 30, 2013||Current outstanding shares||Stocks vested at IPO||Vesting up to 2016||Total stocks in 2016|
|Shares of common stock||131.2||343.5||474.7|
|Fresh issue of stocks in IPO||70||70|
|RSUs granted before Sep 2013||11.87||73.79||85.66|
|RSUs granted after Sep 2013||7.2||7.2|
|Mopub acquisition (common stock to be issued)||14.8||14.8|
|Common stock to be issued further under 2013 plan||80.3||80.3|
* All convertible preferred stocks will be converted to Common Stock on IPO date will create 343.5 million shares
Twitter IPO details
Twitter came out with an IPO valuation of $11 billion, which is more conservative than what most analysts estimated. However, the dilution which will take place post-IPO is something which will hurt investors a lot. Using the valuation and the midpoint of the expected price range we get the outstanding shares used to calculate the IPO valuation as 594.6 million shares. However taking into consideration all possible dilutions as mentioned in the latest amended S-1 filing by the company, we get maximum possible outstanding shares as of 2016 as 775.47 million.
Twitter IPO diluted stock price
|Twitter IPO price (midpoint of range)||$18.5|
|IPO valuation||$11 billion|
|Pre IPO LTM price sales ratio||20.6|
|No. of shares used to calculate IPO price||594.59|
|Max outstanding shares in 2016||775.47|
|Diluted price per share||$14.18|
We get the value of Twitter, comparing it with Facebook and Google IPO valuations, in the range of $6.58 billion to $13.77 billion. This gives us a value per share of $8.48 to $17.75. Just as we had expected the hype seems to have been priced into the issue with the IPO price in the range of $17 - $20. However considering the stock dilution, which will happen up to 2016, we get an average price of $13.12 which makes Twitter’s IPO expensive even though the valuation is seemingly modest. The IPO investors could face a maximum potential dilution of 29% up to 2016 if all RSU’s, stock options, warrants, shares for Mopub acquisition, 2013 stock plan and Employee stock purchase plan are exercised by 2016. Investors will do well to remember Benjamin Graham and avoid the typical IPO frenzy.