Is Twitter worth investing in at the IPO price?

Twitter raised its IPO price earlier this week, but is the company now overvalued?

Earlier this week, Twitter raised its IPO price by 30%, to $23 and $25 a share from between $17 and $20.

This didn't come as a surprise as the stock was already reportedly oversubscribed, indicating that interest for its shares were on the rise, partially due to the lower-than-expected share price.

But the question now becomes, is Twitter worth investing at the IPO price?

Obviously, there are different views on this, with some saying the company's growth potential is worth the risk, and others saying the company is highly overvalued given its current revenue and profit.

Yes, you should invest!

On the side of pro-Twitter investment is BTIG Analyst Richard Greenfield.

In a note written on Monday, before the raising of the IPO price, Greenfield wrote that he would invest in Twitter, even at the high end of the original price range, $20. Greenfield is projecting that Twitter will have $1.1 billion in revenue next year, and $1.75 billion by 2015.

As such, there is big upside to investing early in the company because there is a lot of room for growth. 

"We realize that our expectations significantly exceed management’s due diligence guidance.  However, after taking into account the risks and opportunities for Twitter in the next few years, particularly the opportunity to develop a more engaged base of MAUs, we believe that our projections are actually conservative," he wrote.

He even expects Twitter to have greater growth than Facebook "given the relative stage of maturity of the two companies."

Of course, there are still risks to investing in the company, he noted, involving how its management team executes and if they can "figure out ways to better engage their MAUs to drive timeline views." Greenfield also noted that the company needs to monetize internationally, as well as watch out for Facebook stealing its features, including hashtags.

Like I mentioned, the note was written based on the original IPO price range, so Greenfield made an update to  his note as well, saying that he would still invest, but this time at the lower end of the range.

"We would participate within the $23-$25 range, albeit, simple math would dictate that management should price at the bottom-end of the new range (previously, we had assumed pricing at the high-end of the $17-$20 range)," he wrote.

No, don't invest!

On the other side of the coin is Brian Hamilton, Chairman of Sageworks, who doesn't see Twitter as a good investment because the company is just not that valuable. 

“With Twitter’s IPO, can we use a little common sense and look at the numbers? They are a profound example of another company with a serious overvaluation challenge," he said.

At the high end of the updated IPO price range, Twitter is being valued at $13.6 billion, meaning that is being priced at 43 times its revenue at the end of last year, which was $316.9 million.

He also pointed to the fact that Twitter is still losing money.

Twitter saw rapid revenue growth from 2011 to 2012, jumping 198% to $316.9 million. And it's net loss decreased by 38% to $79.4 million. But while revenue in the first six months of 2013 also rose, going up 107% to $253.6 million, so did the company's net loss. That rose 41% to $69.3 million.

"Compare that to Facebook’s IPO value at 22 times sales, Apple’s 10 times sales, and Microsoft’s four times sales," he said. "Unlike Twitter, these companies were actually making money at the time of their IPO.  Remember these relative value comparisons the next time someone tries to talk about how 'conservative' this Twitter valuation is."

He also dismissed the arguments that Greenfield, and other analysts, are making: that the company has a huge amount of growth potential.

"Proponents of the stock are talking about the potential of Twitter, but most companies that go public have potential, so this is immaterial to the conversation," said Hamilton.

The investor perspective

While it is good to get the views of analysts and people who study these things, the question can only really be answered by one group of people: the investors themselves.

And they do not seem be all that keen on investing in Twitter, according to an AP-CNBC poll released on Monday.

Asking 1,006 people over the age of 18, less than half, 49%, of active investors view Twitter as a bad investment. And those with higher incomes of $75,000 or more are even more skeptical, with 56% doubting the stock's prospects.

There is an overall lack of belief that the company will be a success, with only 35% saying that it was "extremely likely" that Twitter will be successful in the next five years. 

While those under the age of 35 do have faith in the long-term prospects for the company, with more than half saying it would be a success within the next half decade, 52% of them also said they would not invest.

The final IPO price is expected to be set on Wednesday night, with initial trading beginning on Thursday.

(Image source: https://lerablog.org)