Twitter's Post-IPO Life Will Be About Communicating Profits

NEW YORK (TheStreet) - It's almost ironic that as Twitter moves toward an initial public offering, the 230-million member plus micro-blogging site is limited in what it can say about its financial prospects. Once the San Francisco-based company lists its shares, however, it will enter a phase where its performance will hinge on communications from top executives such as CEO Dick Costolo.

It is a subtle distinction, which may prove a helpful way of thinking about Twitter ahead of its initial public offering. Twitter is looking to sell 70 million shares, in an offering that is initially being priced at between $17 and $20 a share.

An offering at the high-end of those prices would value Twitter at roughly $10.9 billion, given a share count of 544.7 million outstanding shares.

Twitter is currently in a "quiet period" as it moves toward an expected Nov. 7 IPO, which restricts the company's communications about its business to the wider public.

The social network continues to hum with today's news and ideas. It's also presenting a business model to prospective investors in so-called "road shows" across the country leading up to its offering on the New York Stock Exchange (NYX). By all accounts, Twitter has kept its road show a relatively tame affair when compared to the excitement surrounding Facebook's (FB) cross-country investor excursion ahead of its blockbuster May 2012 IPO.

According to Jeffrey Sica, president & chief investment officer of SICA Wealth Management, a recent Twitter road show presentation was a "wet blanket," meaning the company may have tried to curb expectations by detailing how the company will seek to convert its users into profits.

Twitter also didn't talk much about how it would seek revenue beyond targeted ads that the company has rolled on desktops and mobile devices out in recent years. That will likely come after Twitter's IPO. "There wasn't really much that needed to be said because they are coming out at a fair valuation," Sica said.

For now, Twitter is likely to impress enough investors by the sheer size of the network's scale and its burgeoning base of revenues, according to Sica, who sent analysts and portfolio managers to Twitter's Oct., 28 presentation in Philadelphia. He expects that Twitter's offering will be over-subscribed.

Managing investor expectations may prove to be a smart strategy for Twitter ahead of its IPO. Recent comments from newsmakers as prominent as David Einhorn of Greenlight Capital and Lawrence S. Fink of BlackRock indicate some markets may be getting a bit frothy as investors chase risky assets.

"I think right now there definitely is a large amount of enthusiasm and excitement when it comes to markets," Scott Kessler, an equity analyst with S&P Capital IQ said in a Friday telephone interview.

Kessler valued Twitter at between $11.3 billion and $13.7 billion, in a comprehensive Oct. 28 analysis of the company's share offering. While Twitter offers a differentiated and globally scaled communications product from competitors such as Facebook and LinkedIn  (LNKD), Kessler believes the company may not have as broad an appeal as some in the media and investor community believe. Meanwhile, the company isn't profitable and Kessler expects losses through 2014.

"Ultimately, we see considerable growth and opportunities and considerable uncertainties and risks, and believe the public valuation for Twitter could be stretched from the start," Kessler concluded. A lot of Twitter's perceived value or lack thereof will depend on the company's IPO pricing, which is expected to be set on Wednesday evening.

After Twitter's IPO, the company's value will also hinge on its ability to adapt its earnings streams and its success in communicating the strategy to investors.

Facebook shares stagnated for months after its $16 billion IPO until CEO Mark Zuckerberg was able to communicate and then show in earnings that the company could build significant mobile advertising revenues to replace falling desktop usage.

A similar scenario is likely to hold true for Twitter, and in that respect, it could be a positive for prospective investors that Costolo and Twitter have left a lot about their business unsaid.

In terms of some goal posts for Twitter's IPO valuation, Sica of SICA Wealth Management and a steady stream of recent analyst valuations indicate that the company's stock price would become stretched at $30 a share and beyond.

Sterne Agee analyst Arvind Bhatia said in a Monday client note that Twitter could be worth between $25 and $32 a share in the next 12 to 24 months, respectively.

In a bullish scenario where the firm's advertising and data licensing platform impresses its partners, Bhatia said Twitter could be worth as much as $48 a share. Were Twitter's execution to disappoint investors, Bhatia pegs the company's value as low as $13 a share.

"As such, if the IPO is priced in the $17 to $20 range, shares would appear attractive from a risk-reward standpoint," Bhatia wrote. The analyst noted that Twitter's usage is tilted heavily towards mobile devices with 76% of its users accessing the network via mobile.

Twitter is also in the early stages of its international revenue growth. Currently, international users account for 77% of Twitter's overall user base but just a quarter of the firm's overall revenue.

On Monday, TheStreet contributor Douglass Kass of Seabreeze Partners said he would be willing to pay $32.50 a share for Twitter's stock, citing the company's strong market position, its user base and a modestly-sized share offering. Kass also highlighted Twitter's "reasonable valuation vs. peers" such as Facebook, LinkedIn and Zillow, which trade at higher multiples of sales and average revenue per user.

Twitter will trade under ticker symbol 'TWTR.'

Goldman Sachs (GS) will lead Twitter's IPO, while Morgan Stanley (MS), JPMorgan (JPM), Bank of America (BAC), Deutsche Bank, Allen & Company and CODE Advisors will also participate in the offering.

-- Written by Antoine Gara in New York

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