Why Is Twitter Selling Its Stock So Cheap?

Is Twitter overreacting to the bad press that followed Facebook's IPO?

Is Twitter overreacting to the bad press that followed Facebook’s IPO?

Photo by Lionel Bonaventure/AFP/Getty Images

When Twitter goes public next month, it will sell its shares for between $17 and $20 apiece, the company announced Thursday. That implies that the company as a whole is worth around $11 billion, depending on how you calculate.

It sounds like a lot for a company that’s losing money. But it’s actually much lower than a lot of market-watchers expected, based on the company’s rapid growth and untapped potential. One early report predicted a share price of $28 to $30 and a valuation topping $15 billion. And some analysts have projected that the valuation could hit $20 billion once trading begins. What gives?

The short answer is that Twitter wants to avoid a public-relations debacle like the one that engulfed Facebook when it set an ambitious share price of $38 in its IPO last year only to see the bottom fall out in the days and weeks that followed. Within four months Facebook’s stock had dipped below $20, and its IPO was widely seen as a cautionary tale.

Was it really, though? Sure, the privileged investors who got in on the ground floor whined about it, because they didn’t get a windfall. And perhaps the drop in the company’s stock ratcheted up the pressure a bit on Facebook to boost its revenue in subsequent earnings reports. But Zuckerberg and co. weathered the backlash and came out the other side a stronger company. Facebook stock is now trading above $50. And by setting the price as high as the market would bear, Facebook maximized the amount of capital it raised from the IPO, which is, after all, sort of the point. (Well, that and enriching the company’s current owners.)

Twitter can’t escape the comparisons to Facebook. But it’s a very different company—more of a media company than a social utility—and a much smaller one at this stage than Facebook was when it went public. In fact, it may never be as big as Facebook. On the bright side, people don’t fear and loathe it like some do Facebook. So if it wants to succeed long-term, it ought to follow its own playbook rather than basing its decisions on what did and didn’t work for Zuckerberg.

Maybe you could argue that lowballing its IPO price is in fact Twitter’s way of signaling that it’s different than Facebook, and managing expectations. But a modest price bounce on the day of its IPO might make for good press and fuzzy feelings, it’s hard to see any concrete upside. At worst, it may suggest that the company’s leaders lack the spine to plug their ears and do what’s in the company’s best interest, bad press be damned. That stubbornness, if anything, is the Zuckerbergian (and Jobs-ian, and Bezos-ian, and Gates-ian) quality that Twitter will most need to emulate if it’s to hold its own in the great, cutthroat tech-business wars for years to come.