Twitter – Empty table

There is now nothing left on the table for shareholders.

• Expectations are that Twitter will price above the top of the already increased price range.
• This moves the shares meaningfully above my valuation before it even trades.
• Don’t get me wrong, I like Twitter as a company.
• I think that it has steady growth secured until 2016 and its competitors have so far failed to repeat its success despite a pretty simple premise.
• Furthermore, the relevance of the data that it collects is very high thanks to the way its users elect to follow certain streams.
• This gives it the ability to offer very targeted and relevant advertisements that users are likely to find less annoying.
• Hence, the problem of being limited to such a narrow slice of Digital Life (see here) is not going to be a problem before it hits around $2bn in annual revenues. (around 2016).
• The problem, I have is the valuation of the shares which have been increased beyond that which I believe is fair.
• Compared to Facebook and Google, I believe that Twitter is worth $12.5bn pre money.
• Add on the $1.75bn that is expected to be raised and I have a post money value of $14.25bn.
• To arrive at the per share valuation one needs to work out how many shares have been issued and this is where the problems begin.
• The financial press is using the headline figure of 544m shares and on this basis a price of $25 per share looks reasonable.
• Unfortunately the real figure is very different as there are a lot of options that need to be properly accounted for in order to reach the correct fully diluted share count.
• If one includes everything that could be issued, then the share count could be as high as 785m.
• This would mean that Twitter is going to IPO at $19.6bn which even the bulls might think is a little rich.
• My analysis of the S-1 document suggests that the following shares should be included in the count:
  • 474.7m common equity
  • 70m new shares issued
  • 10m green shoe
  • 42.7m stock options
  • 0.1m warrants
  • 7.2m restricted stock units
  • 25% of 85.7m restricted stock units. I have included 25% of these because they vest over a period of four years and so only 25% can become common equity within the next 12 months.
• This gives a fully diluted share count of 625.8m shares.
• From the S-1 I have excluded:
  • 14.8m from the MoPub acquisition as it has not closed and the assets and revenues are not on the current Twitter balance sheet or income statement.
  • 68.3m share options that relate to future stock compensation plans.
  • 12.0m share options that relate to future stock option plans.
• Using a fully diluted share count of 625.8m, Twitter is coming to market at a post money valuation of $15.6bn which is above my valuation of $14.25bn.
• Using the fully diluted share count gives a valuation of $22.76 per share some 9% below the issue price of $25.
• The stock is likely to strong during the first few days before any hint of fundamentals kicks in.
• Those that get stock should use that opportunity.