Today: Twitter begins its road show with a price seen as reasonable to cheap, but the company could still mimic Facebook with later changes. Plus: Zynga stock hits 52-week high, as Apple (AAPL), Google (GOOG), Facebook shares slide.
The Lead: Twitter could boost price and size of IPO, but that's Facebook's path
Twitter began pitching its initial public offering to investors Friday with a price analysts described as unexpectedly cheap, but the social network could decide to follow rival Facebook's path by increasing its price or size after gauging Wall Street's interest.
Twitter updated its IPO filing Thursday afternoon, announcing it plans to sell 70 million shares in a price range from $17 to $20, which would send $1.4 billion to Twitter's San Francisco headquarters and value the company at $10.9 billion at the high end of the range.
Analysts were mildly surprised at the pricing, since Twitter said in its updated S-1 filing with the Securities and Exchange Commission that it had valued its shares at $20.62 in the private market in August. Though that estimation was likely done with a different share count that did not include the 70 million shares created in the offering, moving down from that number shows a tame approach to the process that could drive investors' interest.
"It's a lower price than expected and lower than the private shares markets indicated, which means it is highly likely to be oversubscribed," meaning there will be much more demand for shares than Twitter is so far willing to sell, Wedbush Securities managing director of equity research Michael Pachter told The Mercury News on Thursday.
The company will determine demand for its IPO during its "road show," which kicked off Friday with the posting of a video presentation Twitter will use to pitch the offering and executives' visit to underwriter Morgan Stanley's headquarters in New York. The road show presentation notes that Twitter plans to sell shares and begin trading the week of Nov. 4, and the company could choose to increase the price or number of shares offered ahead of that process.
"Shrewdly, the company has started the process very conservatively," SunTrust Robinson Humphrey analyst Robert Peck, who has already given Twitter shares a $50 price target, told The New York Times. "Based on the investor interest we've seen, I wouldn't be surprised to see the price go up 20 percent."
Facebook, the IPO Twitter is most often compared with due to the similarity of their services and revenue generation, started out with a much wider range of $28 to $35 before going on its road show with a much more polished video than Twitter. After investors showed great enthusiasm for the offering, the Menlo Park company chose to add more shares to the pot and increase its price range to $35 to $38, eventually selling shares at the top of the revised range for a record-breaking valuation.
Twitter's initial range gives it wiggle room to raise the price while likely avoiding the issues that caused Facebook to trade lower than its IPO price for more than a year. The original range "gives them room to move up the price without offending investors' sense of value," Rett Wallace, CEO of Triton Research, told The Wall Street Journal.
A more definitive test will be if Twitter decides to increase the size of its offering. Facebook added 95 million shares to its offering after the road show, with all of the additions coming from early investors seeking to cash out part of their private stash of Facebook shares. In the end, Facebook offered 183 million shares while stakeholders offered 301 million, including the overallotment.
So far, no early Twitter stakeholders have chosen to sell stock in the company's IPO, which would give a small group -- including co-founders Evan Williams and Jack Dorsey -- the majority of shares in the public company. That could be important for two reasons: Twitter has chosen to establish a single-tiered stock system, so each share has the same say in control of the company, leaving large stockpiles as the only way to have an outsize influence; and it looks good to investors that those who picked the company early believe it will continue to prosper.
"You don't see a big owner coming out and selling everything," Suntrust's Peck told Bloomberg News. "That shows conviction about the long-term prospects of the company."
Twitter seems to be learning from Facebook's mistakes. After Facebook's first day of trading was botched on the Nasdaq exchange, Twitter chose the rival New York Stock Exchange for its listing, and has already run a test to ensure a smooth opening day. Twitter also goes public with strong, definable mobile revenues, while Facebook took more than a year to show mobile revenue growth strong enough to push its shares above the IPO price.
When deciding on whether to increase the price or size of its offering, Twitter will likely again err on the side of caution -- and the other side of Facebook -- by choosing one or the other if making a change.
"Raising both the price and the size was Facebook's fatal mistake," PrivCo CEO and founder Sam Hamadeh told Reuters.
SV150 market report: Positive earnings reports outweighed by drops
Wall Street gained Friday on the strength of Thursday's tech earnings reports, which led to soaring share prices. Only one of those companies was from Silicon Valley, however, and weakness from Apple, Google and other Bay Area tech giants caused the SV150 to sink.
Zynga, Silicon Valley's entry into Thursday's earnings parade, jumped to a new 52-week high of $4.05 in Friday trading, but those gains dissipated in the afternoon session and the San Francisco social-gaming pioneer ended the day with a 5.5 percent gain at $3.73. Investors' excitement was spurred by the company's ability to post a smaller loss and larger revenues than expected, but tempered by a continuing downhill slide in its user base. Amazon, which hit an all-time high and gained 9.4 percent to $363.39, and Microsoft, which led the Dow with a 6 percent gain to $35.73, held their post-earnings gains better than Zynga.
Smaller SV150 companies that gained following Thursday earnings reports included San Jose's Monolithic Power Systems, which hit an all-time high and gained 17 percent to $32.29 after posting large revenue gains; and fellow semiconductor company Maxim Integrated, which impressed investors with its earnings report even before realizing gains from its recent acquisition of Volterra Semiconductor and gained 3.6 percent to $30.10.
Losses were more common across the SV150, though, especially at the top. Apple dropped 1.1 percent to $525.96 after its new iPhones went on sale in Russia, where analysts said the gadgets were too expensive for typical Russian residents. The Cupertino company will release earnings after the markets close Monday afternoon, and is expected to announce a third consecutive quarter of year-over-year revenue declines while battling activist investor Carl Icahn. Google dropped 1 percent to $1,015.20, and Facebook fell 0.9 percent to $51.95 amid reports that it will not launch video ads this year and that Twitter is more popular with teens. LinkedIn dropped 1.1 percent to $240.70 while fighting off accusations that its new email feature threatened users' security, and Tesla Motors (TSLA) declined 2 percent to $169.66 despite avoiding an investigation into a recent Model S fire.
The SV150 index of Silicon Valley's largest tech companies: Down 6.25, or 0.44 percent, to 1,401.1
The tech-heavy Nasdaq composite index: Up 14.4, or 0.37 percent, to 3,943.36
The blue chip Dow Jones industrial average: Up 61.07, or 0.39 percent, to 15,570.28
And the widely watched Standard & Poor's 500 index: Up 7.7, or 0.44 percent, to 1,759.77
Check in weekday afternoons for the 60-Second Business Break, a summary of news from Mercury News staff writers, The Associated Press, Bloomberg News and other wire services. Contact Jeremy C. Owens at 408-920-5876; follow him at Twitter.com/jowens510.