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Twitter sets sights high with $1.8-billion public offering

The Twitter logo is pictured on an phone post on the floor of the New York Stock Exchange, Nov. 6, 2013.

Richard Drew/AP

Seven years after the first tweet was tweeted, investors finally have the chance to use the service to make money at the same time as they share witty observations about the world in 140 characters or less.

Twitter priced its shares at $26 (U.S.) late yesterday, $1 more than the expected range. The company announced the share price in a tweet Wednesday night. The shares begin trading Thursday morning on the New York Stock Exchange, in one of the most anticipated stock debuts since Facebook's choppy offering in May, 2012

The deal is believed to have raised more than $1.8-billion, making it the third biggest U.S. IPO of the year, behind Plains GP Holdings' $2.9 billion offering and Zoetis' $2.6 billion deal, according to Dealogic.

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The company is a rare bright spot in a public market that has seen more than its share of profit warnings and earnings misses in recent weeks as the United States economy continues to struggle. Investors are being offered the opportunity to get in on a hot social media company that is big on promise and short on profit – at least for the time being.

"Twitter is coming to the public market earlier in its growth cycle," said Santosh Rao, an analyst at GreenCrest Capital Management in New York. "Investors will give Twitter the benefit of doubt when it comes to its revenue and profitability potential … opportunities are plenty, [including] international monetization, more engaging content to drive ad revenues, second screen for media partners, e-commerce down the road."

Twitter allows its users to send out 140-character messages from their computers and mobile devices. It has about 230 million users around the world, but has taken on a central role in news and information sharing that has pushed its influence beyond its user base – celebrities use it to bypass the paparazzi by sharing their own candid photos, Prime Minister Stephen Harper used it to scoop the national media on his cabinet shuffle, protesters rely on its short messages and real-time urgency to organize themselves against totalitarian regimes.

Now Twitter must find a way to make money amid the messages. It hopes to do this by selling ads within the service and selling data licences with detailed historical and real-time analytics about what its users are doing while logged on.

"Twitter's scale and deeply engaged user base create valuable opportunities for advertisers to leverage the platform," Sterne Agee analyst Arvind Bhatia said. "Advertisers can communicate directly with their followers for free, or they can purchase Twitter's advertising services to reach a broader audience."

Its most recent financial data, released last month, show it managed to earn $422-million in revenue through the first nine months of its fiscal year. It is not yet profitable, with a net loss of $144-million over the same time period. That's almost 90 per cent higher than the same time a year ago, as the company ramps up its marketing and spends more aggressively on its expansion.

Some have expressed concerns about the sustainability of its expansion – many users stop using the service shortly after signing up because they don't quite understand why they are there in the first place. It is often unfavourably compared to Facebook, which is far larger and serves a more general base than Twitter.

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Facebook initially struggled when its shares went public, but their value has doubled in the last three months. It posted a $425-million profit in its most recent quarter, as it has found more ways to get advertising in front of its 1.1 billion users.

"Twitter has established itself as an open, global broadcast network, enabling anyone to distribute and build an audience for their content," Atlantic Equities analyst James Cordwell said. "With lower scale and engagement levels, and weaker network effects than Facebook, the company's ability to maintain and grow its user base will likely be a persistent concern for investors."

Still, analysts have taken some comfort that Twitter is already earning about 70 per cent of its advertising revenue from the mobile market. The ability to deliver advertising to phones and tablets is a pressing concern for advertisers, particularly as broadcasters and news organizations struggle to serve mobile viewers with ads.

Brian Wieser, senior research analyst at Pivotal Research Group in New York, has addressed concerns about the company's growth so frequently he has a stock answer for clients.

"In a word or two, when asked about the topic we typically reply 'users, schmusers,'" he wrote in a note to clients. "Twitter's scale is big enough and unique enough to have sufficient scale to be a big business … our observations have found a series of wise or clever [management] choices which provide us with confidence that the company can continue to evolve the underlying platform and business over time."

Follow me on Twitter @sladurantaye

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