Is Twitter worth more than its own IPO targets?

Morningstar on Friday joined three other brokerages in setting price targets for Twitter Inc well above its IPO price range, suggesting the stock has room to rise at least 30 percent.

The Wall Street independent investment research firm on Friday set a price target of $26 a share, compared to the initial public offering’s $17 to $20 indicative range. Last month, Pivotal Research had set its price target for the social media micro-messaging company at $29 a share, SunTrust at $50 and Topeka Capital at $54.

Twitter, which is wrapping up its first week of meetings with prospective investors across the United States, will arrive on the New York Stock Exchange with a fraction of the users and revenue – and hype – that accompanied Facebook Inc’s much-heralded debut last year.

Twitter said in October it doubled its revenue in the third quarter to $168 million, but its losses widened as costs grew. It has never made a profit.

Morningstar analyst Rick Summer said Twitter’s user growth will form a “critical mass” that would capture new advertising budgets. Twitter, which has partnered with broadcasters to position itself as a “second screen” to traditional TV, could receive a slice of advertising deals that previously would have gone to TV exclusively.

“For example, the company recently agreed to a commercial deal with the National Football League to distribute proprietary content (short replays) to Twitter users,” Summer said in a research note.

Some analysts say Twitter could grow above the valuation of roughly $11 billion inferred by the company’s IPO plans. Others worry, however, that Twitter has so far offered scant evidence it can generate enough revenue with its staple “promoted tweets” ad product, especially without significantly growing its number of users – never a guarantee in the fickle world of social media.

Investors who met with Twitter executives during this week’s roadshow say they are optimistic about the deal, in part because they see little sign of some of the exuberance that preceded Facebook’s IPO and in part because of what they argue are reasonable valuations.

At an IPO price range of $17 to $20, Twitter would be valuing itself at 17 to 20 times trailing 12-month sales, according to Reuters’ calculations based on IPO filings, excluding shares issued in the future. Facebook trades at about 17 times trailing 12-month sales and LinkedIn Corp at roughly 19 times.

Final pricing is expected on November 6.


Jeff Sica, founder of Sica Wealth Management, whose clients own shares in Twitter, said that at an investor lunch, “All they could really talk about is a one dimensional way to make money” in breaking news and media. “That’s when you start to see the limitation for revenue generation going forward.”

Also, Facebook on Wednesday said it would cap how often ads are shown to users, leading analysts to believe the company may have discovered a limit to how many social media ads can be exposed to users before they get irritated. In the very long run, that could hold implications for Twitter, given their similarity in advertising models.

But bullish analysts note explosive revenue gains by both companies.

Brian Wieser, an analyst at Pivotal Research, saw positive signs in Twitter’s third quarter, saying that the 123 percent revenue growth exceeded his expectations while user growth appeared robust.

The bull case for Twitter was first made weeks ago by Robert Peck, an analyst at SunTrust Robinson Humphrey who slapped a $50 price target on Twitter before the company priced its shares.

“Many investors will look at Twitter vs. Facebook, as an appropriate comparison. While we think there are many similarities between the two companies, we think Twitter is a unique company, with aspects of Google, Facebook, LinkedIn and Yahoo in its DNA,” Peck said.

Topeka Capital similarly saw value in Twitter’s unique network. “Twitter has become synonymous with social TV,” analyst Victor Anthony wrote. “If Twitter captures just 1 percent of these global TV ad budgets, that could mean over $2 billion in revenues for Twitter annually.”

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Is Twitter worth more than its own IPO targets?