Twitter's $1 Billion IPO Comes With Risks
Twitter's $1 billion initial public offering is one of the most eagerly-anticipated stock market events this year, but transitioning to a public company comes with a number of significant risks.
Before I get to those, here are some of the key financial stats about the company's projected value.
In August, Twitter valued its own stock at $20.62. With nearly half a billion internal shares at the time, the company valued itself at around $10 billion. Some analyst estimates have placed Twitter's potential common stock value as high as $30; on 472,613,753 shares outstanding, that would peg the company's value at $14 billion. (The company is likely to add more shares when it goes public, which would increase the company's value further.)
But the company is not profitable now, nor has it ever been. In 2012, Twitter reported a net loss of $80 million, a decrease of nearly 40 percent from the prior year. For the six months ended June 30, Twitter reported a loss of $70 million, an increase of 41 percent, on top of a $418 million deficit.
While lack of profitability is common for young high-tech companies, Twitter also has staggering revenue increases. Sales nearly tripled in 2012 to $317 million.
The road ahead includes plenty of challenges for the business. Here's where the major risks lie:
Slackening User Growth
The growth of Twitter's active user base, which hit 215 million by June 30, 2013, is slackening. And Twitter's S-1, filed late on Thursday, indicates the biggest opportunity for expansion will come from outside the U.S., but there's a revenue conundrum built into that. For a company that gets nearly 90 percent of its revenue from advertisers--primarily U.S.-based advertisers--it's going to have to fight harder and harder to maintain its growth rate here to get to profitability.
"Users outside the United States constituted 77 percent of our average monthly active users in the three months ended June 30, 2013, but our international revenue, as determined based on the billing location of our advertisers, was only 25 percent of our consolidated revenue in the three months ended June 30, 2013," the company reported in the S-1 filing.
In other words, Twitter is finding more opportunity where it currently has only a quarter of its revenue. But advertising income overseas represents only $0.30 per view, compared to $2.17 per view in the U.S., Twitter says.
The S-1 calls out Argentina, France, Japan, Russia, Saudi Arabia, and South Africa as countries where it expects to have the highest growth rate for active users going forward.
A New Advertising Frontier
Analysts say Twitter will continue innovating no doubt around marketing programs, especially newer ones it currently has in place, such as linking commercial tweets to conversations people are having on Twitter with hashtags about television shows.
"Twitter will have to build out more than just the simple sponsored story or sponsored tweet and sponsored accounts, and to do that it will have to start to innovate with things like its TV offering," says Zachary Reiss-Davis, an analyst for Forrester Research, in Cambridge, Massachusetts.
That could include more highly-targeted ads served to customers while they are Tweeting, Reiss-Davis says, as well as a richer advertising experience coupled, perhaps, with other media forms like video.
Pressure to Prove Ad Performance
Social media advertising is a largely new and untested space, and the S-1 points out an associated risk for Twitter is convincing advertisers that new ways to reach customers will work.
"Advertisers will not continue to do business with us, or they will reduce the prices they are willing to pay to advertise with us, if we do not deliver ads in an effective manner, or if they do not believe that their investment in advertising with us will generate a competitive return relative to alternatives, including online, mobile, and traditional advertising platforms," Twitter reports.
Plenty of Competitors
Other risks the company faces are products and services from competitors such as Facebook, Google, LinkedIn, Microsoft, and Yahoo as well a slew of smaller companies.
Who Stands to Win
Some of the big winners from the planned IPO exit will be board director Evan Williams, who owns 12 percent of the company. The IPO will make him an instant billionaire. Co-founder Jack Dorsey, now a chairman, and chief executive of payment innovator Square, owns 5 percent of Twitter and will own stock worth about $500 million from the offering. Chief executive Richard Costolo owns a relatively modest 1.6 percent of Twitter.
Venture capital firms and early investors in the company include Benchmark Capital Partners, Spark Capital, and Union Square Ventures each will have a 5 percent ownership stake.
One of the big surprises in the S-1 is that the venture capital firm Rizvi Traverse Management, associated with Hollywood investor Suhail Rizvi, owns 15 percent of the company.
Co-founder Biz Stone, who left Twitter in 2011, was not listed in the S-1 as an owner.
Twitter will set its share price following a road show, expected to start as soon as three weeks from now, where it will present its offering to potential investors, to gauge interest. It will trade under the ticker TWTR. Goldman Sachs, the lead underwriter, says the offering will take place some time in the fourth quarter.
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