Much chirping over Twitter IPO valuation

In light of the Facebook fiasco, many industry watchers wary of overvaluing the social networking website, estimated to be worth more than $11 billion.

Goldcrest Capital, a financial services firm that specialises in pre-IPO companies, has valued Twitter at more than $11 billion. Fred Tanneau / AFP

Investors are now circling Twitter following reports of a planned initial public offering (IPO) next year of its shares that is expected to value the social networking website at more than US$11 billion (Dh40.4bn).

The Saudi Prince Alwaleed bin Talal last year paid around $300 million for a 4 per cent stake in the company.

According to sources close to the prince, the move was non-strategic in the sense that Prince Alwaleed will not be asking for board representation or seeking to influence future company policy. It is understood that the investment was made purely in the hope of making a substantial capital gain.

Since then, investor interest in Twitter has started to grow quickly. The prince's investment also coincided with an unrelated $400m venture capital investment in the company in late September. The company's estimated market value has risen by about $3bn since that investment and is still climbing.

Goldcrest Capital, a financial services company based in the United States that specialises in pre-IPO companies, has valued Twitter at more than $11bn and reports that the company is now preparing for an IPO in 2014.

There is also speculation that Twitter may become an acquisition target for a larger player. According to The New York Times, the information technology giant Apple is already in talks with Twitter to discuss its potential acquisition.

Apple has already integrated Twitter in its iOS and OS X Mountain Lion software, and it is also widely expected to be incorporated into the next version of the Apple iTunes music service and Apple TV.

Acquiring Twitter would barely dent Apple's war chest of more than $110bn. But it would give it a significant presence in the globally mushrooming social networking industry at a time when the company is seen by many to be floundering through a lack of product innovation.

However, the underlying fear of many industry watchers is that there is a danger of overvaluing social networking companies purely on the strength of their user numbers. Twitter may have 100 million regular users, but Facebook has 750 million and still suffered a botched IPO.

Eden Zoller, the principal analyst at international research firm Ovum, says Twitter has shown strong, sustained growth in terms of users, "which is positive". But, she adds, "what needs to underpin a sensible valuation of the company is how well Twitter monetises its platform and users, and how effectively it can grow profits and revenues in the long term".

She adds: "This, and not speculation as to who might acquire it, should be the starting point."

Twitter's advertising strategy is still in a relatively early stage and, until the company is listed, it is not sufficiently transparent to allow potential investors to make an accurate appraisal of its finances.

"What we need to see is a clear, strong road map of how it intends to innovate going forward. 2013 will be a litmus test for Twitter on both the monetisation and innovation front," says Ms Zoller.

A Twitter offering will, nevertheless, take place under the shadow of Facebook's botched IPO last year. Tech investors cannot easily forget seeing Facebook's shares plummet in the weeks and months following its much hyped and overvalued public offering.

"Twitter is a powerful property but likely will be tarnished in an IPO as a result of Facebook," says the Silicon Valley analyst Rob Enderle of the Enderle Group.

Some analysts hope, however, that memories of the disastrous Facebook IPO will direct the market towards an accurate valuation of Twitter. "The fallout from the much hyped Facebook IPO will hopefully make the market more cautious and assessments of Twitter more rigorous and level-headed," says Ms Zoller.

But with at least a year to go before the expected Twitter IPO, the time for caution could soon be over. At the current estimated value of $11bn, Twitter already looks overpriced in comparison to earlier IPOs.

When Apple, which towards the end of last year became the world's most heavily valued company, made its IPO in 1982, it was valued at under $2bn.

A generation later, the search giant Google, which is now leveraging its massive online presence to diversify into everything from home power metres and digital TVs to driverless cars, had its IPO in 2004. Being a market leader in search engines and having a clear revenue strategy, Google was valued at $23bn, under 10 per cent of its current value.

Although Twitter is valued at under half what Google was at the time of its IPO, it is far from being a market leader and so far lacks Google's lucrative advertising strategy. Its estimated market value could however continue to rise to a level closer to Google's IPO valuation by the time the company eventually lists.

While an overvalued Twitter IPO could benefit early investors such as Prince Alwaleed, the subsequent fallout could succeed in bursting another dot-com bubble.