Twitter Charts Conservative IPO Course

Twitter has set the price range for its highly anticipated initial public offering at between US$17 and $20 per share, according to a document filed on Thursday with the Securities and Exchange Commission.

The company plans to raise as much as $1.61 billion by selling between 70 million and 80.5 million shares. With some 544.7 million shares outstanding after the IPO, this puts the value of the company at $10.08 billion based on an $18.50 average price.

Twitter is currently on course for its stock market debut to be in the middle of November.

It will be selling about 12 percent of the company to the public. The share sale on the New York Stock Exchange will be the largest Internet company IPO since Facebook’s debut last year. According to the filing with the SEC, Twitter has 218 million monthly users, with some 500 million tweets sent each day.

Fairly Priced?

With Facebook’s controversial IPO still fresh in most investors’ memory, Twitter’s relatively conservative approach may make a good deal of sense. Facebook shares were priced initially at $38 per share, but then later soared to $45 before slumping.

“The average investor is most often hurt when buying ‘familiar’ brands without a deep understanding of the potential monetization strategies of those brands,” Chris Silva, founder and principal analyst at High Rock Strategy, told the E-Commerce Times. “It’s the reason Apple stock sees such wild fluctuation the day of an announcement, whether popular or not.”

Of course, while Facebook’s IPO is often held up as a model for what to avoid, there’s no denying that it did raise a lot of money.

“Facebook had a very successful IPO — people bought the stock,” Charlene Li, partner and founder of the Altimeter Group, told the E-Commerce Times.

“The question is what you use to define a successful IPO,” she explained. “If you are the investor, you want a lot of pop and to see the stock price go up, but for Facebook, the IPO raised a lot of money for the company. That’s what the IPO is supposed to do.”

‘That Is Going to Dampen the IPO’

Of course, while Twitter’s IPO will be closely watched, it should be remembered that this is in fact just the beginning — from there, Twitter will need to show investors that it can actually monetize its content. That puts a lot of weight on each of those 140 characters.

“While Twitter has created a number of good revenue opportunities such as sponsored tweets and other advertising, their potential revenue and products to bring to market are still question marks,” Silva said. “A conservative opening price point seems a good way to avoid a market disappointment while leaving the stock price plenty of running room as their profit models mature.”

Therein lies another difference between Facebook and Twitter.

“Twitter wants that bigger first day pop,” suggested Li. “You have to realize that Twitter isn’t profitable, so they can’t be as aggressive as Facebook — by the time of its IPO, Facebook was already highly profitable. The revenue stream is not as clear for Twitter, and that is going to dampen the IPO.”

Indeed, “Twitter is losing money and is a young company,” agreed securities attorney Andrew Stoltmann.

“Investors in IPOs in hot companies often forget the basics of investing,” Stoltmann added. “Long term, earnings drive share prices. Suspending rational thinking is a recipe for investing disaster; unfortunately, many investors will do so with Twitter.”