Monday, October 28, 2013

Updated Twitter IPO valuation by Prof. Aswath Damodaran

Here's an update to the interesting in-depth look at the valuation for Twitter by Aswath Damodaran, Professor of Finance at the Stern School of Business at NYU:
His bottom line:
My completely uninformed guess is that the bankers think that Twitter's fair price is closer to $25/share and that they have set the range at roughly 20% below those estimates. If the offering goes as choreographed, here is how it should unfold.
  1. The road show will be well received and the bankers will announce (reluctantly) that the high enthusiasm shown by investors has pushed them to set the offering price at $20/share.
  2. Institutional investors will start lining up for their preferred allotments at that offering price and the enthusiasm bubble will grow.
  3. On the offering date, the stock will jump about 20%-25%, leading to headlines the next day about the riches endowed on those who were lucky or privileged enough to get the shares in the offering.
  4. Some of the rest of us, who were not lucky or privileged enough to be part of the offering, will be drawn by these news stories into the stock, pushing the price higher, and keeping the momentum game going.
  5. In a few months or perhaps a year, some of the owners of Twitter (big investors and venture capitalists) will be able to sell their shares and cash out.
So, what can go wrong with this script? The biggest actor in this play is Mr. Market, a notoriously moody, unpredictable and perhaps bipolar (though that may require a clinical judgment) character. As was the case in Facebook, a last minute tantrum by Mr. Market can lay waste the best laid plans of banks and analysts.
His revised estimate the value per share increased to $17.84/share. The current IPO price range is $17 to $20.
His real bottom line:
If the momentum game turns against the stock and the price drops to $10/share, I will be ready to by [sic].
Yes, I will in fact keep enough reserve cash so that I too can buy (more) if TWTR does eventually fall to $10. I bought some Facebook (FB) when it was under $18, but I didn't "participate" in its IPO.

-- Jack Krupansky


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