As Twitter went public Thursday morning, shares in the social networking outfit soared well above the initial offering price, hitting $45 at closing time.
Twitter's future looks very bright. It's now a $25 billion company -- not bad for an outfit that lost $134 million in the first three-quarters of this year. Other unprofitable Silicon Valley ventures should thank Twitter for garnering so much attention -- and for getting investors all hot and bothered over technology IPOs.
More importantly, those same startups can learn from Twitter's Wall Street savvy. The company's big day was largely the result of how well it played its cards in the run-up to the big offering. By all accounts, Twitter waged a carefully calibrated campaign to avoid the fate of Facebook, which exited its 2012 IPO with lots of money in the bank, but also with lots of questions about its market momentum.
The rub is that, with its campaign, Twitter paid a steep price in dollars, and its IPO tactics raise broader questions about the risks and benefits of public financial events whose value is measured as much in glory as in financial credibility.
What exactly happened during the IPO? Last night, Twitter priced its offering at $26 per share, meaning that’s how much was banked on each bit of new stock issued today. It also means that about $1.8 billion was raised for Twitter itself, or $2.1 billion if underwriters decided to sell from an optional bonus pool. But when made available to the public on the New York Stock Exchange under the ticker TWTR, shares began trading just above $45 per share, a spike of 73 percent, before closing the day at essentially that same level.
In some ways, that's bad news for Twitter. As Fortune’s Dan Primack points out, the company essentially gave up $19 per share, the spread between what the company made on each of its new shares via its underwriters and what investors on the open stock market ended up paying for those shares. That’s $1.3 billion in foregone dollars, meaning Twitter could have taken in 60 to 70 percent more cash (depending again on whether that bonus share pool was tapped).
But foregoing that money created public excitement, excitement that could help Twitter sign up users (as it needs to do) and advertisers (as it really needs to do). Leaving it on the table was a conscious decision, sources tell the Wall Street Journal, part of a plan to avoid the backlash that plagued Facebook after it successfully captured nearly all of its market worth during its IPO and thus failed to spike above its offering price.
This was just one way that Twitter wowed the masses. In the lead up to the IPO, the company also craftily managing expectations. Two weeks ago, Twitter estimated that its share price would be between $17 to $20. That produced a flurry of press coverage. Then, a few days back, it bumped the estimated pricing up to $23 to $25 per share. That produced another blizzard of coverage, and this time people were trumpeting Twitter’s upward stock momentum.
By Wednesday night, Twitter priced its stock still higher at $26, stirring a third press frenzy. By the time Twitter went on sale to the public, that public was under the impression that the company had developed an unstoppable momentum. Whether by accident or design, Twitter had lent itself an air of success.
What's more, Twitter actually benefited from its decision to go public when it wasn't making any money. That may sound like a paradox. But it's true.
Because its annual revenue is under $1 billion, Twitter was allowed to take advantage of a provision in the JOBS Act allowing it to submit drafts of its IPO registration to the SEC for confidential feedback. This means Twitter didn't have to air its dirty laundry before the IPO, unlike Facebook, whose annual revenue of $3.7 billion meant it was forced to fix its registration statement in public.
By the time Facebook went public, the structure of its business was well established. It was clocking $1 billion in annual profit at IPO time. Twitter, meanwhile, is bleeding money, with the perverse benefit that because its business model is not yet apparent, optimistic speculators can imagine any future they want. Maybe Twitter will become a hub for television viewers. Maybe it will revolutionize advertising in emerging markets. Maybe it will become an unlikely force in e-commerce. The sky’s the limit -- as long as you stick to using your imagination rather than Twitter’s scant track record.
Well played, Twitter. But eventually, you're gonna need more than just a good game. You're gonna needs profits.
