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Last updated: October 4, 2013 8:29 pm

Twitter woos investors with safe sales pitch

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Boring is good. That is the message that Twitter has attempted to project on its path to the most anticipated stock market debut by an internet company since Facebook.

The publication of its prospectus that officially set the share sale in motion was unerringly true to form.

Conspicuous by their absence were the grand flourishes seen from other Silicon Valley notables at such times, such as Google’s promise to “make the world a better place” or Facebook’s pledge to create “a more open culture.”

Instead, the company that revelled in being a tool for revolutionaries during the Arab spring contented itself with a brief and understated promise to always work “in ways that improve – and do not detract from – a free and global conversation”.

By the numbers: Twitter

By the numbers: Twitter
Valuation and Twitter's money men

Nor will Twitter, as a public company, be the preserve of its all-powerful founders, as has been the case with other recent internet IPOs that have involved the use of dual-class share structures to enshrine founder control. Instead, it revealed straightforward leadership and boardroom governance arrangements that will make it more akin to a traditional company.

Equally absent were the unpleasant surprises that have sometimes made investing in internet IPOs a minefield. Those have included, in recent years, Facebook’s warning about a possible dent to its business from the shift to mobile internet use, as well as Groupon’s attempt to foist an unconventional way of calculating its profits onto potential investors – at least, until regulators intervened.

“There was nothing that stood out as weak, no unusual metrics that had to be uncovered,” says Ryan Jacob, head of Jacob Asset Management, a tech investment firm.

Instead, his reaction to the publication of the company’s share sale prospectus reflected the almost palpable sense of anticlimax that spread through the Twittersphere on Thursday afternoon: “There really wasn’t a whole lot surprising.”

What emerged, instead, was the picture of a company that may struggle under the massive weight of stock market expectations about to be heaped on its shoulders. Still relatively small and likely to remain lossmaking for a while, even if it is growing strongly, Twitter has already stirred hopes for a stellar stock market debut that the disclosure of its actual business performance did nothing to damp.

At $448m over the past 12 months, Twitter is approaching Wall Street with double the revenue that LinkedIn, the professional networking site, reported ahead of its own IPO in 2011.

Yet LinkedIn, already at the time a profitable company, was valued at $4.3bn – well below the $12bn-$15bn that is being talked about as likely for Twitter by some shareholders and advisers, as well as analysts and tech investors who have no interest in the stock.

Meanwhile, at roughly $2 for each of its 215m active users, its annual revenue is below the level of arch-rival Facebook, which had reached $4.28 before it went public, or even LinkedIn, at $3.24.

And its base of active users, though still expanding at more than 40 per cent a year, is growing more slowly than the pre-IPO LinkedIn and at only around the same rate as Facebook – even though the bigger social network had more than 800m users at the time.

The comparisons highlighted the biggest question that was left hanging over the company by Thursday’s disclosures: can it justify the high expectations as it follows the other social networks to Wall Street?

Thursday’s publication of the Twitter prospectus has started the clock ticking on a three-week period before the social media company is allowed to begin an investor roadshow to promote its shares, setting it up for a likely first day of trading on November 8.

One key to success will be convincing Wall Street that it can find a way to spin profits from its extensive global reach. US users accounted for only 23 per cent of its audience in the most recent quarter, but generated 75 per cent of the revenues.

There is a gulf to cross before the rest of the world pays its way: Twitter makes $2.17 for each 1,000 views that US users make of their Twitter timelines, compared with 30 cents internationally.

With its heavy reliance on advertising, meanwhile, Twitter also lacks the diversified revenues of a company such as LinkedIn. Nor does it have Facebook’s all-embracing grip on its users, which has given the more established network additional opportunities to make money, according to Mr Jacob.

Yet the potential remains tantalising. Unlike Facebook, which had no mobile advertising business before it went public, Twitter already earns 65 per cent of its income from that source. And, with relatively low revenue per user, the upside could be considerable if its advertising takes root.

It is this prospect that has whetted the appetite of Wall Street’s bulls. It also explains why LinkedIn, rather than Facebook, has become the company on which Twitter has come to model its IPO.

The amount of revenue that the professional social network gets for each user has jumped more than threefold since it went public and is forecast to hit nearly $8 this year. The revenue lift has fuelled a surge in LinkedIn’s stock price and boosted its value more than fivefold, to $27bn.

That contrasts with Facebook. After feeding high expectations in the run-up to its own IPO, the euphoria peaked with a stock market valuation of more than $100bn – before the stock fell back by 50 per cent on slowing revenue growth.

For now, the Twitter bulls seem to be in the ascendant.

“My impression is that $12bn is a relatively conservative valuation, which would set it up for upside,” says Kevin Landis, a tech fund manager at Firsthand Funds, which owns about 1m Twitter shares. “They’re clearly trying to get this out and traded before people trip over themselves to get higher still.”

As an existing shareholder, Mr Landis has every reason to hope. But his views were widely reflected on Thursday, as potential investors tried to anticipate how much speculative cash would be drawn to the IPO, and what it might do to the share price.

The difficult task before Twitter and its bankers in the coming weeks will be to keep investors focused on the huge payday that may lie ahead – without inflating a valuation bubble that will haunt the company for months or years to come.

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