Speaking earlier this month on an investor webcast, Henderson’s Stuart O’Gorman described the listing as “hot as hell” but highlighted the lack of transparency in terms of how it could be valued.
“It’s a great business,” he said. “It’s very useful but it’s another wonderful stock story so I’m sure Twitter will absolutely fly off the shelves.
Hot hot hot
“It’s going to be another one of these very hot, ‘everybody-wants-to-buy-in’ IPOs but, in fairness, that was the case with Facebook and sometimes they don’t work out. You can play a liquidity trade on those things. Usually they work but you have to be very light on your feet to avoid getting burnt. As I said, with Facebook we didn’t get burnt but I think an awful lot of people did.”
Consultancy BDO questioned whether the valuation was justified.
Director of valuations, Tomas Freyman, said despite the $11bn coming in lower than previous predictions, it was still potentially premature.
“This is still very high for a company that has yet to make any profits. Value in Twitter is being largely driven by the hype surrounding the brand and the recent successes of other online businesses including Google, LinkedIn and Facebook, despite the latter’s early wobbles.”
Twitter has opted to list on the New York Stock Exchange, rather than Nasdaq, the typical exchange for technology businesses, such as Facebook which is valued at $52.60 per share, LinkedIn which currently sits around $242 whereas Google, hovering around $1,018 on 25 October, with a steady decline the day of the Twitter valuation announcement.
BDO’s Freyman added: “Facebook and LinkedIn are reaching new highs daily and are trading at p/e ratios in excess of 200x and 900x respectively but can we really justify these sorts of valuations?
“With the final pricing due to be set in the next couple of weeks we must ask ourselves if we are seeing history repeat itself with this latest social media bubble. Investors will inevitably make up their own minds on the appropriate valuation but we should all be mindful of the ‘real’ drivers of value, namely cashflow and profitability.”
Topical storm
O’Gorman, speaking on his investor call, raised similar concerns.
“Another sign that we’re in a bit of a bubble is what’s happening with IPOs. The first-day returns we’re seeing in IPOs – and these are just a few very recent ones – are back to the days of 50%-plus IPO returns for really hot stocks.
“All of these guys have interesting technology but they are coming now at nosebleed valuations. There are a lot of people piling into these investments who don’t really know what they do, but they know it’s very exciting. They know it’s Cloud, they know it’s whatever, it’s SaaS or anything else. And, again, that terrifies me that at some stage it can go very badly wrong.”
Elsewhere in the sector, Killik & Co’s Jonathan Jackson, head of equities, pointed to Amazon’s success last week following its Q3 results, issuing a ‘buy’ signal last week at a price of $332.
He said net sales were up 24% to $17.1bn, which were ahead of analyst expectations of $16.7bn.
Looking ahead, he praised the global leader in online commerce, expecting it to take full advantage of the long-term growth trend for online retail.
“We believe it will continue to take market share as retail spend moves online and as it expands into new verticals, geographies and services.
“In addition, the development of Amazon Web Services and third-party sales, should help to drive the margin back to levels consistent with peers. The strategy is not without risk, given the expansion into the hardware market with the Kindle, and the high level of investment needed both in the retail business and AWS, but we believe that the potential long-term value creation outweighs the risks.”
