Twitter IPO: Risk factors and investing
Twitter has submitted its filing to the U.S. Securities and Exchange Commission (SEC) listing potential risks to the business across several different areas. In this series, we look at each of these risks in turn and what this means for anyone planning to invest in the company.
From the filing (in bold):
"In making your investment decision, you should understand that we and the underwriters have not authorized any other party to provide you with information concerning us or this offering."
The Twitter IPO challenge
Twitter wants you to read its whole prospectus and make your decision. It does not want you to be swayed by the media hype and frenzy surrounding its share offer as it progresses up to IPO.
"We may invest or spend the proceeds of this offering in ways with which you may not agree or in ways which may not yield a return."
Twitter anticipates that it will make capital expenditures in 2013 of approximately $225 million to $275 million. It intends to spend this money in the way that it wants to. It might spend this cash on employee stock vests, corporate acquisitions or tax liabilities.
In short, Twitter will decide how it will spend its cash — which might not be the way its shareholders want.
"Purchasers in this offering will experience immediate and substantial dilution in the book value of their investment."
Dilution could reduce an investor's stock price below the initial purchase price.
Dilution is a general term that happens when companies issue additional common shares at IPO. It can also happen when employees exercise their stock options. This could change the percentage owned by an individual or group of shareholders.
If this happens the value of every share will be reduced.
"If securities or industry analysts do not publish or cease publishing research or reports about us, our business or our market, or if they change their recommendations regarding our common stock adversely, the price of our common stock and trading volume could decline."
If influential media reckons that Twitter stock all in all is a bad bet, then investors will not purchase shares. The price of the stock will reduce as stock traders try to sell the stock in a market where few want to buy.
"We do not expect to declare any dividends in the foreseeable future."
If you buy Twitter stock, you might just have to wait until the stock price increases above your purchase price before selling.
Twitter does not anticipate declaring any cash dividends to its stock holders.
It advises investors that are looking only to recoup dividends on the stock not to buy Twitter shares.
"Prior to this offering, there has been limited trading of our common stock at prices that may be higher than what our common stock will trade at once it is listed."
Twitter has traded some stock privately in the past at a privately negotiated price. This might be different to the price on the open market. Twitter wants its investors to know the nature of its prior speculative trades.
"The market price of our common stock may be volatile, and you could lose all or part of your investment."
Twitter does not yet know the price its investors might be willing to pay for its stock. It warns against buying stock at a time when its price is fluctuating.
This could be due to; price and volume fluctuations in the stock market, public perception about the S-1 filing, disputes over intellectual property, acquisitions by Twitter or its competitors, litigation and rumours about its business.
"A total of [unknown] or [unknown], of our outstanding shares of our common stock after this offering will be restricted from immediate resale, but may be sold on a stock exchange in the near future. The large number of shares eligible for public sale or subject to rights requiring us to register them for public sale could depress the market price of our common stock."
Shareholders offloading significant amounts of stock could reduce the market price of stock. Essentially the market could become flooded with low priced Twitter shares.
The road to Twitter's IPO:
Twitter’s executives have signed lock-up agreements where they agreed not to sell any stock for 180 days after the prospectus was issued. On February 15th 2014 stock may be released on to the market and reduce the stock price.
It might be difficult for you to get a good price if you sell your Twitter shares at this time.
"We have incurred significant operating losses in the past, and we may not be able to achieve or subsequently maintain profitability."
As of June 30, 2013, Twitter had an accumulated deficit of $418.6 million. Its revenue has grown rapidly to date but it anticipates a slow down as its growth in users decline.
It needs to invest in technology, employees, international offices, and research and development, in order to continue to grow its user base. Twitter also expects its costs to increase in future.
Twitter has also granted stock to its employees, which will vest each year. As of June 30, 2013, it had "unrecognized stock-based compensation expense" of approximately $296.7 million which it would need to award to its employees over the next four years.
"We are an emerging growth company, and any decision on our part to comply only with certain reduced reporting and disclosure requirements applicable to emerging growth companies could make our common stock less attractive to investors."
An emerging growth company is deemed to have "total annual gross revenues of less than $1 billion during its most recently completed fiscal year and if, as of December 8, 2011, it had not sold equity securities under a registration statement."
Twitter will continue to be considered an emerging growth company for the first five fiscal years after it completes an IPO, unless its total annual gross revenues are $1 billion or more.
Twitter cannot predict if investors will find its common stock less attractive if it chooses to rely on these exemptions.
Based on the above risk factors would I buy Twitter shares?
The value of the stock market goes down as well as up. Historically over the long term — say the last 40 years — the stock market has risen. There are bumps along the way of course so investors looking for a quick win or dividends will be disappointed.
Facebook stock climbed back to its initial offering price after a year. Fluctuations in Twitter stock might also take time to smooth out.
Twitter does rely on industry analysts and influencers to report favourably on its flotation but it seems to have covered all foreseeable risks in its S-1 filing. It is trying to make its investors fully aware of every limiting factor that it can.
Based on these risks, I would buy Twitter stock.
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