How Twitter Fooled Investors Into Paying 45 for IPO Stock Corporate

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TWITTER'S 2013 INITIAL PUBLIC OFFERING

Launched in 2006 with headquarters in San Francisco, Twitter (hereinafter alternately "the company") leveraged its increasingly popular social media platform into an impressively successful initial public offering (IPO) in 2013 that generated enormous attention from investors and media alike as well as $1.8 billion in capital through the planned sales of 70 million shares of stock for the company based on a closing stock price of $44.90 a share (Henry and Rosenthal 2014). To determine how the company generated so much attention as well as billions of dollars in capital through its IPO, this paper reviews the relevant literature to provide an overview of Twitter and the industry in which it competes, a discussion concerning important financial and other facts about the company based on its Security and Exchange Commission (SEC) filings, and an analysis concerning how successful the IPO was in raising capital for Twitter. In addition, an assessment of the company's performance since its 2013 IPO is followed by an analysis of the trend in Twitter's stock price since the IPO. Finally, a summary of the research and important findings concerning Twitter's IPO are provided in the paper's conclusion.

Overview of the company and its industry

Today, Twitter is one of the most popular social media sites, trailing only Facebook in the number of monthly active users (MAUs) who use the service on a daily basis (Edosomwan, Prakasan, Kouame, Watson and Seymour 2011). Although widely regarded as a fairly recent industry, the history of social media networks dates to the mid-20th century with so-called "phone phreaks" who gained unauthorized access to corporate voice mailboxes to produce the first "blogs" and "podcasts" (Edosomwan et al. 2011). Social media networks gained increasing popularity as the result of the introduction of the email in the late 1960's and the Internet in the 1990s (Edosomwan et al. 2011). From the outset, the company has been in the vanguard of innovation, an attribute that has materially contributed to its success. For instance, according to Edosomwan and his associates, "In 2006, Twitter came into existence. Twitter gained a lot of popularity first because it offered more different options such as micro blogging and secondly because it was used by some celebrities" (80).

Today, the company operates as a worldwide platform that serves as a readily accessible outlet for real-time public discussions and self-expression for a global audience (Twitter Profile 2015). Although the company's range of services and products continues to expand, its current offerings include the flagship Twitter platform that facilitates real-time communications of user-generated text and multimedia content between members, as well as a mobile application that allows members to create and distribute their own short-duration looping videos (Twitter Profile 2015). Beyond the foregoing, Twitter also features promoted services and products, including: promoted tweets, accounts, and trends that allow marketers to advertise their brands, services and products as well as subscription access for the company's real-time data feed (Twitter Profile 2015).

Moreover, Twitters features a wide range of networks tools, public application program interfaces (APIs), and embeddable widgets that can be used by developers to provide and distribute customized content to the Twitter platform (Twitter Profile 2015). In sum, according to the company's most recent Form 10-Q quarterly report, "Our goal is to reach the largest daily audience in the world through our information sharing and distribution platform products" (Twitter Form 10-Q 2015: 3). To its credit, the company has been increasing successful in achieving this goal as discussed further below.

Discuss important financial and other facts about the company from its SEC filings

The company has been highly effective in growing its global business and continues to enjoy steady increases in revenues. For instance, as noted above, the company's overarching goal since 2013 has been to grow its business globally, and the $45 billion generated by the IPO has significantly contributed to this effort. In this regard, Twitter's most recent Form 10-Q quarterly report emphasizes that, "We have already achieved significant global scale, and we continue to grow. In the three months ended June 30, 2015, we had approximately 316 million monthly active users (MAUs) spanning nearly every country" (Twitter Form 10-Q 2015: 4). In addition, the company estimates that the actual total global audience for its online content may be as high as two to three times the number of actual MAUs (Twitter Form 10-Q 2015).

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Not surprisingly, Twitter reports significant financial growth following its IPO in 2013 in its several SEC filings. For example, Twitter's most recent Form 10-Q (August 2015) reports that the company's revenues for the 3-month period ended June 30, 2015 was over a half billion dollars ($502.4 million), representing an impressive 61% gain compared to the same period in 2014 (Twitter Form 10-Q 2015). The company also reports increases in its mobile application revenues which accounted for the lion's share (88%) of Twitter's advertising revenues (Twitter Form 10-Q 2015). Likewise, the company also reported substantial financial growth immediately following the 2013 IPO, with revenues for the 3-month period ended September 30, 2014 totaling $361.3 million, representing a 114% increase versus the same period in 2013 (Twitter Form 10-Q 2014). Taken together, these trends in earnings reported to the SEC suggest that the hefty price paid by investors during the company's IPO was justified, and these issues are discussed further below.

How successful was the IPO in raising capital?

Although the company's stock price fluctuated somewhat throughout the IPO with a low of $44 and a high of $50.09, it settled on $44.90 a share by the close of the stock market, generating $24.1 billion in capital for the company, making this one of the most successful IPOs in history (Curtis 2013), and was far and away more successful than the $26 per share envisioned by the company's leadership team for the planned sale of 70 million shares of stock (Henry and Rosenthal 2014). According to some industry analysts, though, this hefty price was based more on hyperbole and inflated expectations concerning Twitter's future potential than on hard facts about the company. For instance, the head of Equity Strategy at Saxo Bank, Peter Garnry, observed that, "The valuation at these price levels is disconnected from any logical calculation and reflects a huge downside risk for investors if Twitter does not meet expectations at every quarterly earnings release from now on" (cited in Curtis 2013: 3).

Indeed, Garnry and like-minded analysts argued that the frenzied investment in Twitter was based on the same type of spurious assessments that resulted in the countless dot.com failures of the early 21st century. As Garny points out, "For Twitter it is the end of a long journey towards the public market. For investors this is the beginning of nerve-racking journey of whether Twitter can deliver on the huge expectations" (cited in Curtis 2013: 3). Likewise, even the SEC Chair, Mary Jo White, "questioned whether investors could project a company's future potential from unique financial or operational metrics that may not be an indicator of future profitability" (cited in Henry and Rosenthal 2014: 53). While this type of cautionary skepticism was viewed as prudent and justifiable at the time, many investors shrugged off these warnings to invest in what they perceived as the "next big thing" in social media networks as discussed further below.

What has happened to the company since the IPO?

There has been growing recognition that the rush by many investors to get in on the ground floor of Twitter's IPO was based in part on spurious performance data. For example, according to Henry and Rosenthal, the inflated prices paid by investors for Twitter's stock during its IPO were based in part on the company's use of nonfinancial metrics that are used by social media networks to assess their performance. Nonfinancial metrics such as the number of monthly active users, user content creation levels, and the advertising revenue per individual piece of content can be misleading and do not reflect the actual financial performance of Twitter over time (Henry and Rosenthal 2014).

Some of the other key findings to emerge from a study of Twitter's IPO by Henry and Rosenthal (2014) include the following:

1. User data compiled by social media companies is not audited, and there is little consistency in the way companies determine these nonfinancial metrics;

1. The use of nontraditional, nonfinancial metrics as performance indicators is a potential concern for regulators and auditors responsible for ensuring the accuracy of financial reporting;

1. Social media companies may view nonfinancial metrics as performance indicators, but there does not appear to be a clear link between such metrics and profitability; and,

1. The SEC has provided guidance that companies should identify and.....

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