Amid Wall Street’s frenzy over the Twitter IPO, which closed last week, the US Securities and Exchange Commission (SEC) came out with a significant word of warning.
In a speech last Wednesday, SEC boss Mary Jo White cited the unique metrics that tech companies like to use to illustrate the size and growth of their businesses - millions of users, likes, and so on. White did not mention Twitter specifically, but the inference was obvious.
“Our staff’s concern has been the impact on investors of the sheer magnitude of some of these metrics – investors for whom the true meaning of the metric (or more importantly the link from metric to income and eventual profitability) may not be clear or even identified,” White said.
“In the absence of a clear description, it can be hard not to think that these big numbers will inevitably translate into big profits for the company. But the connection may not necessarily be there.”
White’s warning comes 18 months after the abysmally handled Facebook listing. For well over a year after that IPO, there were highly publicised tales of members of the public who spent a significant portion of their life savings on a stock to which they felt a personal connection, but lost heavily. Meanwhile, the banks and Facebook itself walked away with a small fortune.
Like Facebook, Twitter is operating in a sector that is notoriously difficult to predict. The firm hasn’t yet turned a profit, and has posted more than $300m worth of losses in the last three years. The bet that investors in the IPO are making is that Twitter can come good on its promises to monetise its user base for advertising purposes in a way that Facebook hasn’t yet managed to figure out.
The fear is that most of Twitter’s much-vaunted growth plans may already have been priced into the stock – which was priced at $26, up from a range of $17-$20 - before it even starts trading. Given that Twitter probably won’t turn a profit until 2015, stock holders shouldn’t expect to make a quick buck any time soon.
But whatever happens to the stock price, some key figures will be sitting pretty. Evan Williams, Twitter’s former chief executive and the founder of Blogger and Medium will walk away with just a little under $1.5bn. The most high-profile Twitter executives, chairman Jack Dorsey and chief executive Dick Costolo, have their stakes valued $610m and $200m respectively.
Other big winners, of course, include the banks and early-stage investors. These include JP Morgan, Spark Capital, Benchmark and Rizvi Traverse, all of whom stand to collect at least $900m as holders of 5 percent or more of Twitter stock.
But another private stock holder is also set to make a mint from the deal. In 2011, Saudi Arabia’s Prince Alwaleed picked up a $300m ‘strategic stake’ in Twitter, which his office at the time said equated to “more than 3 percent” of the microblogging site. At the time, that stake meant that Twitter was valued at just over $10bn. With the firm now worth $18.1bn before trading opened on Wednesday morning, that means Alwaleed’s assumed stake of 3 percent is now worth an estimated $543m – an 80 percent rise on an investment made just two years ago.
Will Alwaleed cash out at the IPO stage? Not according to a statement from Kingdom Holding, his investment vehicle, which last month hinted that the prince could even consider investing further in the company. Was this a canny ploy to boost confidence in the stock prior to launch, or does Alwaleed really see the long-term benefits of holding Twitter shares? Only time will tell. But it’s hard to escape the notion that the people that are going to make serious money out of Twitter have already done so.