Wednesday, November 6, 2013

TWTR: IPO price and valuation appear too high ...

It appears that TWTR's IPO price will be $26.00/sh representing a market cap of $18.3bil (based on the fully-diluted share count of 705MM), 37.5% higher than our $13.3bil (or $18.90/sh) valuation of the Company.  As usual, those investment bankers did a good job of 'selling the idea' to potential investors.   

We are not saying tomorrow's TWTR IPO will be a failure similar to FB's last year.  However, in our opinion, it is over-priced.  But it is more likely that the market will accept it with open arms as equity indexes keep hitting new highs and the momo stocks (except for TSLA) still have some ... momentum.  TWTR has chosen the right time for an IPO.  Now let's see if 1) the Company can execute and meet/exceed expectations; and/or 2) if the latest momentum-mania slows down a bit or comes to a halt, how much will the abnormally high valuation multiples be discounted.   

Even our much lower valuation of the Company represents some very very high valuation multiples.  While we do admit to our optimism, it appears that the investment bankers have gone even further, as shown in the table below.  Let's put it this way: in our model, TWTR's EV/Sales and EV/EBITDA multiples based on our 2017 estimates are comparable to GOOG's multiples based on its trailing 12 months (Sep '12 - Sep '13) financials.  While this seems out-of-whack, multiples from TWTR's official IPO price (also based on our estimates) do not become comparable to GOOG's until 2018, basically 5 years from today!

Overall, we like the Company's offerings and its strategy going forward, and we note that we are an avid user of Twitter; however, we don't think the Company is worth more than our best-case scenario valuation of $18.3bil.

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