Twitter is a young company generating large losses as it competes in a highly uncertain sector of the economy.
And that is exactly why investors clamored for a piece of its initial public offering, which closed on Wednesday evening.
Twitter’s shares were priced at $26, giving the company an overall value of $18.1 billion, including stock that the company is likely to issue to employees. That makes Twitter worth more than many storied American corporations, likeAlcoa and Harley-Davidson. At that valuation, each of Twitter’s 230 million users around the world is worth $78. Going by such numbers, the public offering has been a tremendous success for the company, which raised $1.8 billion from the offering, a hefty war chest.
All this is impressive for a company that has racked up more than $300 million of losses in the last three years — and may not show real profits until 2015.
But investors are betting that Twitter is virtually destined to become wildly profitable as advertisers pay it increasing amounts of money to reach consumers who use the service.
“The possibilities and opportunities afforded by the platform are limitless,” Dick Costolo, Twitter’s chief executive, said in a company presentation to promote the offering. Still, if recent history has anything to teach, the euphoria is unlikely to last.
The fast-changing world of technology can be cruelly unpredictable. It tripped up companies like Groupon and, for a while, Facebook, Twitter’s much larger rival for advertising dollars. If Twitter also slips up, its shares could tumble fast, too.
“That’s always the peril of high-growth stocks,” said Lawrence Levine, a partner and a specialist in financial valuation at McGladrey, an accounting firm. “So much of the valuation is embedded in the expected growth rate.”
