May 2012 – Facebook Inc (NASDAQ:FB) was the most anticipated IPO in years, perhaps ever. Yet, a series of mishaps both on behalf of the company and the NASDAQ led to it being one of the disappointing IPOs in recent memory. Meanwhile, LinkedIn Corp (NYSE:LNKD), Facebook Inc (NASDAQ:FB)’s competitor, has produced one of the most successful post-IPO campaigns that we’ve seen. With that said, which of the two is Twitter most likely to follow?
Twitter preps for IPO
Last week, Twitter conveniently tweeted that it had submitted an S-1 to the SEC for a planned IPO. According to eMarketer – who provides fairly accurate technology research – Twitter is worth $10 billion to the private markets and will produce revenue of $580 million in 2013. However, recent reports suggest that Twitter’s expected market value could be north of $14 billion!
Currently, any whispers surrounding Twitter’s valuation are simply speculative, but given recent run-ups in shares of Facebook Inc (NASDAQ:FB) and LinkedIn Corp (NYSE:LNKD), a $14 billion valuation – 24 times 2013’s expected sales – seems likely. But for those who may buy shares with a $14 billion market capitalization, will you endure Facebook Inc (NASDAQ:FB) or LinkedIn-like returns?
Understand the business cycle
The difference between Facebook Inc (NASDAQ:FB) and LinkedIn Corp (NYSE:LNKD)’s post-IPO performance has been analyzed, discussed, and publicized in such a way that there is nothing I can say that you don’t already know. Apparently, Facebook priced at $40 was too expensive, and LinkedIn Corp (NYSE:LNKD), at $45 was cheap.
However, to me there is one more piece of the puzzle, which is rarely mentioned, and that is a company’s stage in its business cycle.
For example, when LinkedIn Corp (NYSE:LNKD) became a public company, it had just over 100 million users and had produced $243 million of revenue in the year prior . Today, LinkedIn has 238 million users and has trailing 12 months revenue of $1.24 billion . Essentially, LinkedIn became a public company while in an aggressive growth period, and Wall Street has rewarded that growth with strong gains and a pricey valuation.
On the other hand, Facebook Inc (NASDAQ:FB) had annual revenue of $3.7 billion in the year before going public . Today, Facebook’s trailing 12 month revenue is $6.12 billion . Clearly, Facebook continues to grow, but its growth has not been as robust compared to LinkedIn, and Facebook went through a period where 35% top-line growth was expected .
Today, Facebook is surging with the emergence of mobile, but was still much later in its business cycle compared to LinkedIn. Looking back, companies that have performed the best post-IPO are those that were in aggressive growth phases of their business cycle.
Dwelling on the negatives
Twitter, with expected revenue of $580 million would post 100% growth over the prior year. However, the nature of valuing these Internet based companies leaves the door open for an extra amount of criticism.
Due to the growth of these companies, high valuations are awarded, but we often see analysts/investors dwell on negatives once a company becomes public. In regards to LinkedIn Corp (NYSE:LNKD), the only drawback at the time of its IPO was its valuation, as it was growing rapid and adding new users at an incredible rate. Facebook had problems with monetization, management mix ups, and concerns regarding innovation. Hence, this difference in sentiment also contributed to the performance of each stock.
Now, how does Twitter fit into this conversation? The answer lies in an AllThingsD piece, showing that Twitter’s growth is falling well below expectations. In particular, Twitter was expected to have 400 million monthly active users (MAUs) by the end of 2013 – after hitting 200 million in December 2012 – but Twitter currently has 240 million MAUs.