Perspective: Twitter's success opens up IPO pipeline

When Twitter successfully launched its initial public offering on Nov. 7, filling its coffers and making instant billionaires of its executives and early investors, its Wall Street triumph eclipsed Facebook's troubled launch in 2012.

Twitter's IPO could be a sign that the market is ripe for IPOs by other social networks, and by tech companies in general that held back after Facebook's debacle. Despite the fact that it has never turned a profit, Twitter is spurring other companies to make the fateful leap to Wall Street. (Related story: "By the Numbers: Twitter vs. Facebook IPOs")

"I think [Twitter's] successful IPO speaks volumes about the state of the social networking landscape. It's healthy and growing," said Brian Blau, a Gartner analyst who is watching King.com, a social gaming site, in the run-up to its IPO. "That said, social networking companies can't stand still, and they need to diversify to make sure they can bring in advertisers, brands and businesses."

What happened with Facebook

This market see-saw began in the spring of 2012.

In the run-up to Facebook's much ballyhooed initial public offering, industry and financial analysts had great expectations that the world's largest social network would pull in investors eager to capitalize on the social media craze.

Facebook CEO and co-founder Mark Zuckerberg met with traditional button-down investors wearing his trademark hoodie and T-shirt. Some wondered aloud if the twentysomething executive had what it takes to run a publicly traded company.

Facebook also had to confront a few obstacles close to its opening day. The social network admitted that it was not monetizing its growing mobile user base as it needed to. Then days before the IPO launch, General Motors, one of the country's largest advertisers, pulled out of a $10 million advertising deal with Facebook, saying its paid ads on the social network were ineffective in driving business.

However, neither of those problems stopped Facebook executives from increasing the price range of the company's stock from $29-$34 per share to $34-$38 per share just days before its IPO.

On May 18, 2012, Facebook went public and, despite trading glitches and a 30-minute delay in the start of trading, it opened well. The share price quickly rose 11%, but it began to slide as the day wore on.

Facebook closed at $38.23 a share, barely maintaining its $38 opening price. It did not meet the exuberant expectations of investors who envisioned the stock rocketing to $50, $60 or even $90 a share on its opening day. Facebook's stock price continued to decline for months, hitting its low point of $17.55 per share in September 2012.

It took more than a year for Facebook's stock to return to its opening price of $38 per share.

Twitter enters the fray

It was a tough lesson for other social media companies that were considering going public. If the world's largest social network -- a globally recognized name -- could stumble on its IPO, what would go wrong for them?

Then Twitter stepped onto the stage.

This fall, the microblogging company -- which had grown so popular that astronauts were tweeting from space, President Obama was tweeting from the White House and people around the world were tweeting to inspire political change -- announced that it planned to go public.

Other companies -- startups and social media players -- snapped to attention and watched. Would Twitter's IPO suffer because of the increased scrutiny that Facebook's trouble brought?

The company known for its 140-character messages turned investors' attention away from the fact that it had yet to make a profit and instead focused on how it's changing the way that ordinary people, along with celebrities and heads of state, communicate.

Company executives, wearing business suits to meet with businesspeople, stressed that while Twitter hasn't generated a profit, it is looking toward advertising and its mobile base to clear that hurdle. Twitter sells ads that appear as tweets in users' tweet streams. The company needs to increase that advertising, while smoothly tying it with its mobile base -- and it must do so without angering users.

There are other revenue options for Twitter, such as selling data to other companies. Many businesses would probably pay good money to get statistics on the things people are tweeting about them and their products.

Twitter also started with a low initial price range of $17-$20 a share, but increased the price range twice in the week leading up to its IPO. Its initial offering price was $26, which jumped to $45 a share soon after trading started.

And with that, the landscape changed and social media companies started feeling more confident about attracting investors.

Last week, Zulily, a hot daily deal e-commerce site for moms and kids, rode its own investor enthusiasm and rose more than 70% in its market debut on Nov. 15.

It's a good time for Twitter's success to send ripples across the financial pond. Renaissance Capital, an investment bank, reported that there have been more than 200 IPO launches in the U.S. this year -- 41 of them from the tech sector. In fact, the technology industry has had the third highest number of IPOs in 2013, coming in behind healthcare, with 50, and financial services, with 43.

The year's overall IPO count is the third highest annual count since 2000, according to Renaissance Capital.

Other social media companies are expected to line up to launch their own IPOs.

They include Dropbox, which offers a cloud-based service for sharing and storing photos, videos and documents; music-streaming service Spotify; and Pinterest, a pinboard-style photo-sharing site. Others include Snapchat, a photo messaging startup that reportedly turned down a multibillion-dollar offer to be acquired by Facebook; Flipboard, a social networking aggregator; and Scribd, whose goal is to be the world's largest digital library.

The IPO pipeline is opening up, and companies that had been holding back and waiting for the Facebook cloud to pass appear more willing to make the move. However, we're not likely to see an IPO free-for-all. There's still a segment of the population, mostly the older generation, that has not been so quick to take to social media and might not see the benefits -- either socially or as an investment.

To attract investors, social networks, and the broader base of tech companies in general, need to make sure they're not one-trick ponies, and that they can offer something inventive, maintain an engaged user base, and drive traffic and revenue.

Becoming a household name, like Twitter, doesn't hurt, either.

Analysts agree that the prospects for social media companies in the stock market are more hopeful. But whether that enthusiasm can be sustained as more companies join the fray is yet to be seen.

"Twitter wasn't based on financial fundamentals but hopes and wishes," said Rob Enderle, an analyst at Enderle Group. "Yet it created a feeding frenzy for these stocks.... The market appears ready for more."

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