SAN FRANCISCO -- Twitter began the road to its much-anticipated IPO pledging not to follow in Facebook's footsteps. Now, as it nears the end of what has been a remarkably rapid and glitch-free process, the microblogging service will find out if it gambled correctly.

By pricing its shares at $26 on Wednesday, slightly above its earlier projection, but resisting the temptation to sell even more shares, Twitter and its investment bankers walked a careful tightrope: Set the price and the number of shares for sale high enough to pump $1.8 billion into the company coffers, but not so high as to scare off wary Wall Street.

The outcome will be closely watched by startups across Silicon Valley -- to say nothing of Realtors, landscapers and restaurateurs who hope the IPO will keep the good times rolling.

Facebook, infamously, on the eve of its 2012 IPO hiked both the per-share price and the number of shares it was selling. That tamped down demand when shares hit the public markets the following morning, shutting down the tech IPO market for two months.

Twitter did not increase the more than the 70 million shares it had planned. It did, however, hike its price range twice in the past week: From $17-$20 to $23-$25 on Monday, then a buck higher with Wednesday's final pricing.


Advertisement

Tim Keating, an IPO expert in Colorado, is among those who think $26 dollars a share is still too high for a company that's never made a profit and whose business model still baffles many.

At its new price point, Twitter's valuation is north of $14.4 billion, based on the number of shares the company says will be outstanding after the offering.

That approaches a record for IPO valuation compared to revenues, said Keating, president of Keating Capital. Twitter's market capitalization would be 27 times the $534 million it bagged over the past four quarters; Keating says Palm set the mark with a market cap of 29 times earnings when it went public in March 2000, during the dot-com bubble.

"To be able to support that type of valuation, they need revenues of $2.7 billion in five years' time," Keating said of Twitter. With various experts projecting Twitter to hit $1 billion in revenue next year, it would have to grow significantly faster than the average Internet company to reach that five-year milestone, Keating said.

Many pundits seem to share his concerns: Even before Twitter priced its IPO, the mainstream and financial media were rife with headlines such as "Don't Chase Twitter's IPO" and "Buzz builds over risks and (possible) rewards."

Gartner analyst Brian Blau, on the other hand, pronounces himself unconcerned with Twitter's price hike.

"I still think they are taking the conservative, or call it a tempered, approach to their IPO," he said. "I really feel that Twitter will be fine post-IPO, as long as they can solve some of their user-retention issues and continue to drive the ad business forward."

Twitter primarily makes money by selling advertisers "promoted tweets" -- mini-ads inserted into the flood of 140-character messages that make up a user's Twitter feed.

How the stock fares in coming days and weeks is of concern well beyond the company's boardroom. When Facebook's hugely hyped stock offering failed to take off, many small investors felt burned, especially those not versed in the ways of Wall Street.

According to an Associated Press poll this week, nearly half of active investors say Twitter wouldn't be a good investment.

Then again, a new survey of several thousand users of the social network Knotch found overwhelming bullishness for Twitter heading into the IPO. Interestingly, those users tend to live far outside the tech belt, hailing from such states as Ohio, Arkansas and South Carolina, said Knotch CEO Anda Gansca.

Internet entrepreneur and blogger Jason Calacanis, who cut his teeth as a tech pundit during the dot-com boom, said there's little fear of mom-and-pop investors blowing their nest eggs on Twitter's debut.

"Retail investors really don't buy at the IPO any more," he said. "I think everybody understands gambling on individual stocks isn't a great idea."

Keating is much less sanguine.

"In conversation I've had with financial advisers, the conclusion is that this one isn't gonna be like Facebook, so I should pile in,'" he said. "I don't think there've been any lessons learned at all."

Contact Peter Delevett at 408-271-3638. Follow him at Twitter.com/mercwiretap.