It’s not a perfect analogy, but initial public offerings are to Wall Street as blockbuster movies are to main street: a tremendous amount of hype typically surrounds both events. Marketers shift into a higher gear and promote their product — in one case, a movie; in the other, an investment — and would-be consumers digest the data, generate buzz, speculate, and ultimately make a decision.
Do you see the movie, or not? Do you buy some shares, or not? In both cases, the answer to the question determines the difference between a flop and a success.
With this in mind, the Twitter IPO has taken the spotlight. On Thursday, the social media platform announced via a tweet that it filed an S-1 document with the U.S. Securities and Exchange Commission.
We’ve confidentially submitted an S-1 to the SEC for a planned IPO. This Tweet does not constitute an offer of any securities for sale.
— Twitter (@twitter) September 12, 2013
Because Twitter currently earns less than $1 billion in revenue, it is allowed to file for its IPO confidentially, and the fact that it earns less than $1 billion was confirmed by its ability to file this way. This means that the company does not have to reveal financial information to the public until 21 days before the IPO date.
But in the spirit of the season, here’s an overview of what we do know:
According to marketing agency Saxum, Twitter boasts 554 million registered users and 9.6 million active users. The platform supports more than 2 billion search queries and hosts 400 million tweets every day.
The sheer digital “noise” the platform makes — imagine 9.6 million birds in some massive, Yggdrasil-esque tree, chirping furiously at one another all day, every day — is outstanding. According to Alexa, Twitter.com is the 11th most-visited website in the world.
If Twitter’s place in the pantheon of social media platforms hasn’t put the company on your radar — pretty much any brand that interacts with the consumer market uses Twitter — then its budding monetization mechanism should. EMarketer predicts the service will generate $582.8 million in global ad revenue in 2013, nearly $1 billion in 2014, and $1.3 billion in 2015; this is up from $139.5 million in 2011 and $288.3 million in 2012. Twitter is currently valued at approximately $10 billion.
Twitter’s IPO falls in the shadow of Facebook’s (NASDAQ:FB) infamous IPO, held in May 2012. Shares opened for trading on May 18 at $38 a pop, and some combination of deflating hype, technical malfunction, and market voodoo drove shares down more than 32 percent by June 5; by September, the stock had lost more than 50 percent of its value.
The price action was, perhaps, a wake-up call for CEO Mark Zuckerberg. The company cracked down on monetization and punctuated several quarters of strong financial results with a report in July that drove the company back up to its IPO valuation of about $100 billion. A rigorous focus on becoming a world-class advertising platform with demonstrable revenue streams was what it took to convince Wall Street to drink the Kool-Aid.
Facebook’s snafu has pretty much become a textbook case of what people want to avoid during an IPO, and it will serve as something of a benchmark for the Twitter IPO.
The damage was arguably done when expectations failed to match reality. Hype is a real and dangerous component of any IPO, and with these tech companies, it quickly became clear to investors that there were very loose monetization mechanisms in place. Just because the platform is new and engaging doesn’t necessarily make it profitable. Facebook has learned lessons about this, and Groupon and Zynga are trying hard to right the ship.
Twitter executives have made it clear that they are trying to control expectations. They appear to be acutely aware of the damage that misplaced hype can cause and are seeking to avoid it.
Arguably the most successful Internet IPO that happened in the past few years belongs to LinkedIn (NYSE:LNKD). Shares of the professional social network have increased nearly 170 percent since its debut on the market, dramatically outperforming the S&P 500.
At the beginning of August, LinkedIn reported exceptionally strong earnings. Revenue increased 59 percent to $363.7 million and exceeded analyst expectations, reflecting a pattern the networking service has now stayed true to for nine quarters. Net income increased 33 percent to $3.73 million, or 3 cents per share, and its membership jumped to 238 million, more than double the number of users LinkedIn reported in 2011.