IPO Announcement Sets Wall Street A-Twitter

Taking a page out of Facebook’s success story, Twitter has recently announced its intention to go public through an Initial Public Offering (IPO).

The 7-year-old global company boasts an on-line constituency of 200 million people, and predictions call for an initial valuation of $9 billion.  This valuation can be compared with Facebook, which went public with a $100 billion valuation.

Like Facebook, Twitter has to convince the investment community that its huge online audience can produce a money-making business model.  Under the tutelage of its CEO Dick Costolo, Twitter has set a priority over the last three years of transforming its popularity into an advertising business, and through ads on Twitter called “promoted tweets,” the company is expected to realize $585 million in ad revenue this year.

Twitter wants to avoid some of the mistakes Facebook made with its IPO.  According to the Wall Street Journal, Twitter wants to avoid overpricing its shares or offering too many.  Rather than use Facebook as its model, Twitter appears to be modeling their offering after LinkedIn Corp. and Workday, Inc.  Both saw the price of their shares soar after making their debuts.

Twitter’s business model is based on increasing ad revenues, particularly from mobile devices. While its revenue predictions are sealed because of its confidential filing, analyst firm eMarketing expects Twitter’s ad growth to approach $1 billion next year as compared with an anticipated $585 million this year.  Twitter also purchased MoPub for $350 million just before it made its IPO announcement.  MoPub is a mobile advertising firm that sells ads through mobile properties and figures to enhance Twitter’s mobile revenue stream.

Product development is also a key in Twitter’s future.  The company maintains it continues to experiment with new features and products.  Such product development has been a key to Facebook’s success.

Steady and consistent growth has been a hallmark of Twitter.  As of last March it had reached the 200 million user threshold, and in August¸ the company recorded 143,199 tweets per second during the airing of a Japanese television show.  Like Facebook, Twitter has to convince investors not so much about how many people use it but how much money can be made through the development of a viable business model.

Twitter does have the advantage of learning from Facebook.  Unlike Facebook who chose Morgan Stanley as its chief underwriter, Twitter has selected Goldman Sachs Group as lead underwriter and is now in the process of bringing on additional banks such as Bank of America’s Merrill Lynch and J.P. Morgan Chase, who both played significant roles in the successful LinkedIn IPO in 2011.

While Facebook’s IPO was widely considered to be a botched endeavor with the price of the stock falling after the initial offering, a recent earnings report has proved the social media company is for real.  Continued growth in Facebook’s user base has helped boost revenues and profits and has produced impressive quarter-to-quarter and year-to-year comparisons.