By The Sizemore Letter
This time last year, “social media” was an expletive in financial circles. The Facebook (FB) IPO had long since gone down in flames, as had other new technology IPOs like Groupon (GRPN) and Zynga (ZNGA). At this point last year, Facebook, Groupon and Zynga were off 55%, 83% and 85%, respectively, from their previous highs.
It seemed like a case of the emperor’s new clothes. Social media stocks were surrounded by buzz and hype … yet they didn’t have much in the way of profits.
Then a funny thing happened. In July, Facebook announced earnings that were much better than expected, and — more importantly — announced a surge in mobile ad sales. Perhaps social media could make money after all.
And this brings us to Twitter, which is arguably the most anticipated IPO since Google’s.
Twitter IPO Buzz
What should we expect from the Twitter IPO?
At this point, we can’t draw a lot of conclusions about Twitter’s revenues and profitability. Being private, they are under no obligation to disclose that information. The most credible estimates I’ve seen have the company generating $600 million in sales in 2013 and $1 billion in 2014.
What does that imply for an IPO price? It’s far too early to say. Early estimates value the company at around $15 billion. That would represent a price/sales ratio of 15 based on expected 2014 revenues. That’s expensive, but not unheard of for a tech IPO. As a point of reference, Facebook currently trades for 19.7 times sales.
The success of any investment — IPO or otherwise — ultimately comes down to the price paid. This is a topic we’ll have to revisit as more details about the IPO are released. But in the meantime, there are a few points for us to consider.
First off, Twitter seems to have a more promising business model in place than Facebook did at the time of its IPO (and does today), in that it’s building partnerships with corporate sponsors rather than simply viewing them as disposable, churnable advertising clients.
As an example, earlier this year, ESPN and Ford (F) sponsored instant replay tweets during last season’s college football bowls. And Turner Sports, the NCAA, AT&T (T) and Coca-Cola (KO) followed suit during March Madness.
What are these relationships worth?
Again, it’s too early to determine the exact value of the relationship. But this shows that corporations are becoming engaged with Twitter on a far deeper level than they are with Facebook, where their role is still limited to building a fan page and inviting viewers to “like” it.
Here are some other fun facts from the Twitter blog: 95% of live TV conversation currently happens on Twitter, and half of all national Super Bowl commercials had hashtags on them this past year.
I find Twitter “high-fiving” during football games to be obnoxious and distracting. I prefer to sit and watch the game with a cold beer in my hands and not my smartphone or laptop. But I guess I’m old school.
Still, while I have little interest in tweeting with complete strangers during a football game, the ubiquitous hashtags are proof of Twitter’s emergence as the medium of mass communication. It’s also worth noting that Carl Icahn announced his Apple (AAPL) purchase on Twitter … not Facebook.
How to Profit off the Twitter IPO
So, how can investors without VIP access to IPOs get access to Twitter?
The easiest way is through shares of GSV Capital (GSVC). GSVC is a publicly traded venture capital firm with stakes in several up-and-coming technology companies.
Twitter makes up about 15% of the portfolio, so GSVC is not a pure play by any stretch. But it’s as close as most individual investors can get at the moment, and a successful Twitter IPO should cause many of GSVC’s other holdings to rise in sympathy.
Prior to the Facebook earnings announcement, GSVC’s shares had languished, and the stock traded at a large discount to its book value. You could effectively buy shares of Twitter cheaper via GSVC than buy buying them directly as a private placement. But as Facebook’s earnings surprise has reawakened the animal spirits in the sector, GSVC shares now trade at roughly a 10%-15% premium to book value.
Does that make GSVC expensive? Not quite. GSVC’s book value is a moving target, and its “real” book value would probably be a good 10%-20% higher if its holdings were to be repriced today.
This is a long way of saying that, while it might no longer be the screaming bargain it was, GSVC is by no means expensive if you believe the Twitter IPO will be successful.
Charles Lewis Sizemore, CFA, is the editor of the Sizemore Investment Letter and the chief investment officer of investments firm Sizemore Capital Management. As of this writing, he was long GSVC. Click here to learn about his top 5 global investing trends and get your copy of “The Top 5 Million Dollar Trends of 2013.” This article first appeared on InvestorPlace.
This article first appeared on Sizemore Insights as Twitter IPO: It’s Exciting, But How Can You Profit?
