November 7, 2013, 10:36 AM

Twitter goes public

The social network prices its shares at $26.

Lead Photo

Twitter Inc. began trading today on the New York Stock Exchange at $26 a share, 52.9% higher than the low end of the $17 to $20 range the company projected in a U.S. Securities Exchange and Commission filing last month. It is also above the $23 to $25 per share range the social network announced last week. The revised share price values Twitter at $18.06 billion.

As of 10:40 CDT, its shares were trading at $45.27 a share.

The social network plans to sell 70 million shares, which means its initial public offering could raise $1.82 billion. For the sake of comparison, Facebook set its share price at $38 when it went public last year, valuing the social network at $104 billion. Facebook’s IPO raised more than $18.4 billion. Facebook’s share price today is about $48.

Twitter’s strong pricing suggests investors are eager to buy the social network’s shares, says Josef Schuster, founder of IPO research and investment house IPOX Schuster.

“The nature of the market right now is hugely exuberant,” he says. “But in the long run the company’s revenue will have to grow into its valuation.”

Advertising accounts for the vast majority of Twitter’s revenue. In the third quarter, $153.4 million of its $168.6 million total revenue, or 91%, stemmed from advertising. For the first three quarters of the year, $374.9 million of its $422.2 million revenue, or 89%, stemmed from advertising.

Twitter’s revenue is up 106.3% for the first three quarters of the year compared with the same period in 2012. However, the social network has yet to turn a profit. Twitter says it lost $133.9 million in the first three quarters of the year, up from a $70.7 million loss in the same period a year earlier. Twitter says it lost $79.4 million in 2012, down from a $161.4 million loss in 2011.

Twitter’s lack of profitability is a concern, says Schuster.

“A lack of profitability was the problem for many tech companies in 1999 and 2000 that led to the tech bubble bursting,” he says. “While I don’t expect Twitter to go under, it needs to figure out how to generate a profit to be successful.”

One sore spot for Twitter is its lackluster international revenue relative to the size of its international user base. While 77% of its monthly active users were international in the third quarter, only 26% of its revenue stemmed from international advertisers. That has to change for Twitter to prosper, says Schuster.

However, Twitter’s inability to profit from its large international user base is similar to a problem Facebook faced leading up to its IPO. Facebook’s weak spot was mobile advertising. The social network didn’t launch its first mobile ad unit until the end of the first quarter in 2012. But Facebook acknowledged the shortcoming in the lead-up to its IPO and subsequently developed a slew of new advertising formats—for instance, mobile app install ads that encourage consumers to download a mobile app—and tools to drive revenue from its large mobile user base. A little more than a year and a half later, Facebook’s mobile ads generated $881.0 million in the third quarter, roughly 49% of its total advertising revenue. Facebook’s success with mobile ads suggests that Twitter’s international advertising weakness could represent an opportunity for future revenue growth, says Schuster.


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