Bottom Line: Investors may be sorry they friended Twitter

Elizabeth Fournier

THE comparisons are inevitable. Just 18 months after Facebook made its market debut, Twitter looks likely to have leapfrogged Google to become the second biggest US internet IPO in history – raising up to $2.1bn and, astonishingly, almost doubling its market cap in the first hour of trading.

In contrast to Facebook’s car crash of a first day – Nasdaq glitches delayed trading for 30 minutes and bookrunner Morgan Stanley had to pile in to keep the shares above their listing price – Twitter’s debut couldn’t have gone more smoothly. Having plumped for NYSE over the traditional Silicon Valley choice of Nasdaq, the launch was glitch free – more than 13m shares were traded in the first hour and the price soared. But huge challenges lie ahead.

Since its early tumble Facebook has regained losses and now trades around $45. Its revenues are growing very strongly. Crucially, it makes a profit – and was already profitable when it went public. Twitter is not. In the three months to September it lost $65m – and that’s not expected to change for a couple of years at least. It still needs to work out how to maximise users, and fast. People are still signing up – though in far lower numbers than in its early days – but PeerReach estimates that of the 80m accounts registered in the last three months, only 3m turned into daily active tweeters. That’s more than 96 per cent of accounts lying under-used or at worst dormant – and people not looking at the sponsored Tweets that are its main source of revenue.

Twitter was priced at a huge 33 times its revenue over the past 12 months, and investors have already pushed it much, much higher. That’s far too much to live up to.