Twitter IPO: Why Is Unprofitable Company Worth a Bajillion Dollars?

By William Peacock, Esq. on November 07, 2013 | Last updated on March 21, 2019

Last night, Twitter announced that it was setting its IPO price at $26 per share, more than the $23 to $25 per share that analysts expected. According to Ars Technica, that puts the company's value at $18 billion, and it brings in $1.8 billion in cash, more than the $1 billion the company targeted.

It got crazier. The stock opened at $45.10 per share, and was up 92 percent in the first hours of trading, reports Reuters. Its market value now sits at around $25 billion. This is a company that still has not turned a profit, and isn't expected to do so until 2015 at the earliest.

Facebook, LinkedIn, and Twitter

We did a full comparison of the three IPOs when Twitter became atwitter with IPO rumors.

Too Low

LinkedIn underpriced its IPO, leaving money on the table, but at the same time, it set expectations low. Since then, the company has used its enormous cache of user data (job history, education) to expand into multiple other business areas, including job listings, advertising, and premium user accounts. It recently offered another $1.2 billion in stock -- three times its IPO selloff.

Too High

Facebook set its sights too high for its IPO, and its shares initially plummeted, though they have rebounded above the IPO price now, in large part because the company has improved its mobile advertising delivery. This company also has a massive trove of user data, including a few billion people's likes, hobbies, jobs, social interactions, etc.

Just Right?

As for Twitter, its too early to tell if they nailed it or whiffed. Stock prices are insanely high right now, and they'll almost certainly be selling off an overallotment of more shares due to the high demand, putting their fundraising effort at $2.1 billion, more than Google or LinkedIn, but less than Facebook, according to Reuters.

Or is This Another Groupon?

Groupon was a fad. Flash "daily deal" sites are now a dime a dozen, and the site that started it all is now struggling. USA Today notes that insiders have been dumping shares at an unfathomable rate -- 301.7 million sold in the three months ending in late October. The company's valuation is less than half of what it was at its IPO.

Is Twitter destined for a similar fate? The New York Times' Dealbook reports that investors see big things ahead for the company. For every 1,000 times a user interacts with their account, the company takes in $2.58 in advertising revenue, at least in the United States. Abroad, it's more like 36 cents per 1,000 interactions. There's room for growth in ads, especially international ads.

But does it have that magic "big data" treasure trove? LinkedIn and Facebook are highly profitable ad-delivery mechanisms because they know so much about their users. To sign up for a Twitter account, one needs only to provide a name (real or fake) and a handle. A company is going to learn a lot less, advertising-wise, from @FeministTSwift or @EmoChrisBosh than it will from your photo-tagged, interests-listed, items-liked Facebook page.

Then again, Twitter trends are becoming as important as (and integrated into) television ratings as a way to measure viewers' interests. If Facebook has billions of individual micro data points, Twitter has a landscape of macro data.

Do you tweet? If so, tweet us your thoughts on the blue bird's IPO. Otherwise, join the discussion at FindLaw for Legal Professionals on Facebook.

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