Traders taking Twitter positions long before actual IPO – valuing New Media phenomenon at $10.5bn to $11.5bn

Some financial services businesses are wide awake. At 17:00 New York time yesterday, New Media phenomenon Twitter tweeted that it has applied for a stock market listing. This morning, London-headquartered ETX Capital made a CFD available for trading in Twitter stock – which won’t be listed for months. The ETX Contract For Difference gives traders the opportunity to take a position today. In the first day of trading it valued Twitter as being worth $10.5bn and $11bn. Getting in at these levels could deliver a handsome profit. The more optimistic analysts expect the company to be valued at up to $15bn. On the other hand, just about every pundit is already highlighting the danger of repeating the hyped-up Facebook listing, where the pre-IPO price was pitched so fully it took months for the shares to trade back to that level. Mindful of the heat Facebook’s founder Mark Zuckerberg took over his share’s price point, Twitter executives are apparently determined to play things down. That may not be possible. With revenues set to double once again to over $1bn next year, and Twitter having conquered the short message market, its listing looks more likely for a repeat of the amazing Linked-In experience than the disappointment of Facebook. Well, that’s the conclusion I came to after this thoroughgoing interview with ETX analyst Ishaq Siddiqi, who has clearly done plenty homework leading up to yesterday’s announcement. Terrific insights. By the way, ETX also has a South African office which, presumably, offers locals the opportunity to also play the Twitter trade.  – AH

To watch my full interview with Ishaq Siddiqi on CNBC Africa Power Lunch click here.

ALEC HOGG: Twitter has announced that it has filed paperwork with the Securities and Exchange Commission in the United States ahead of a planned stock market flotation. Of course, it was done on Twitter. While no date has yet been given, nor the indicative price range, private investors already value Twitter at somewhere between $10bn and $15bn. Ishaq Siddiqi is the Market Strategist at ETX Capital. He joins us from London. I suppose we had to expect that when Twitter was going to announce its listing it would do it via a Tweet. But you guys have been really quick off the mark both with analysing what this could mean and even giving us a way to play on the Twitter shares even before they’re listed.  Just a little bit of background: Could you explain this JOBS Act to us – the fact that they could make an announcement that they’re going to list, but not give much more detail?

ISHAQ SIDDIQI: Yes, absolutely. This JOBS Act was introduced in 2012, and it was essentially to induce companies to actually start listing on the stock market. It’s an initiative by President Obama to really kick-start the stock market. IPOs were low on the ground for the last four years given the economic downturn in the US and across the world, many companies were not feeling too confident about listing at times of economic uncertainty. However, we have some certainty back on board. There is a recovery in place, particularly in the US and also signs in the Euro Zone as well as in China. When it comes to a corporate like Twitter who are intent to float on the market, the time is right now. We knew that this is coming. It’s been in the pipeline. I think for Twitter more so than anything else, they don’t want a repeat of a Facebook which is essentially: going on a roadshow, and not really telling your investors what you’re doing with the company, how you’re going to monetise the business but push the brand and how you’re going to expand the business. So I think Twitter’s going to take more of a prudent low-key approach when it comes to the IPO and I think they’re probably going to list it before the end of the year.

ALEC HOGG: Mark Zuckerberg, the founder of Facebook was very involved in the pre-listing of that company. Jack Dorsey has a lot lower profile. Is he a similar type of personality? Do you think he’s also going to be pushing?

ISHAQ SIDDIQI: Yeah, absolutely. The management at Twitter – it’s founded by a number of guys who were somewhat divided (about listing), which is why it’s taking so long to get onto the Board. From what I understand you need around 2000 private investors to back you before the company is forced to float on the market. It seems like Twitter is essentially forced into this because it has that now. A number of investors would like to see the company floating on the market. So when it comes to these road shows, unlike Zuckerberg, Twitter management would really have to quell the market’s worries about how they’re going to monetise the business. That’s the real big concern here. They’ve managed to keep it very underground now, and for the next 21 days they don’t have to reveal how they’re going to run their operations. This is under the JOBS Act that companies generating below $1bn in sales can keep this private. After that they’re going to have a lot of pressure to push more details to the market on how they’re going to use advertising, how they’re going to look into the analytics and data system, the structure and framework and also perhaps about regulation. I think that’s a big concern in the market as well. Twitter is an unregulated space. There have been previous issues where it comes to media accounts being hacked; at the same time bullying and rape threats against women worldwide, so it’s a place that is quite precarious. Twitter management will have to go out there and actually start quelling the investors’ worries and say ‘We are doing what we’re doing to monitor what’s going on in our environment’. I think that’s going to be the message at the road show before the IPO.

ALEC HOGG: What numbers do we have for Twitter?

ISHAQ SIDDIQI: At the moment from what we understand for 2013 they’re generating revenues of about $583m. That’s forecast to go up to $1bn in 2014. At the moment the Market Cap is set to be round about $10bn at the low end, and at the top end, speculation is rife that it could possibly be about $14bn. The interesting thing with Twitter when you compare it to Facebook is that the valuation is still very attractive. Facebook was valued at around some $16bn which many people believe was over-valued and that’s why we saw the massive slide in the stock price right after the stock was listed. I think Twitter management will really have to get the valuation right this time around. It seems like the indicative price range, even though it’s not out right now; if you can calculate from the figures on the Market Cap it will probably be somewhere in the range of between $22 to about $28 per share. So it is going to be interesting going forward. I think right now the market’s trying to digest whether this is going to be more of a play for the institutional clients and the institutional big funds and banks or is this going to be a play for the retail market, for retail clients across the board? And for that reason we are offering our clients an opportunity to trade because our clients are mostly retail and we want to see what sort of sentiment we can get from that.

ALEC HOGG: Take us through how you’re offering your clients this ability to trade. I thought it was highly innovative and quick off the mark.

ISHAQ SIDDIQI: Sure. Well, of course we were watching news break overnight and as soon as we got in this morning we thought it would be a good idea for our clients to essentially trade the Grey Market listing. The Grey Market listing is that you’re not holding the underlying asset. You’re not physically buying or selling the shares. In this particular case you’re trading the Market Cap. Our spread is between $10.5bn and $11.5bn and within that, based upon the demand that we are seeing for the actual spread, the price will fluctuate. Our clients can make a profit on the back of that. So really it’s a great opportunity for our clients to start trading the Grey Market before the actual IPO. It gives them an idea of what sort of demand the Twitter IPO is going to have. It also gives us a better understanding of what our clients are actually looking at, and what they’re looking to buy and generally test that sentiment. We’ve been doing this for a while. We have a Royal Mail IPO set up in the UK for all of our clients internationally. We also did this with Facebook and with Manchester United in 2012. (ahead of their listings)

ALEC HOGG: And what has the reaction been like? Obviously the news only came out last night at 5:00pm US time. Have your clients reacted with excitement?

ISHAQ SIDDIQI: Yes. They have indeed. We’ve seen an increase in buying activity over the course of the last two hours. There’s a market open in the UK. I think going forward when it comes to demand and testing this demand – we of course don’t know when the IPO is going to debut on the stock market in the US – but up until that time what we can do is essentially test the sentiment. I think the interesting thing is that the market knows that there are concerns about the Twitter IPO. There’s not enough detail out there. There’s a lot of uncertainty about how this company is going to monetise itself and run itself as a sustainable business going forward. At the same time, people don’t want to be off the market on the valuation. We saw with the Facebook IPO last year, that the valuation was massively overstated. For that reason, a lot of clients and a lot of investors got on the back of that once the IPO was launched. I think this time around our clients will be a lot more prudent about this. We also urge a bit of prudency and due diligence going into this IPO and really just look for more details before you start getting yourself involved in this IPO.

ALEC HOGG: Ishaq, you spoke a lot about Facebook but there has been another story also in this space, in LinkedIn.

ISHAQ SIDDIQI: Yes. The shares are up some 435% since the IPO. And when it comes to LinkedIn it’s actually a fantastic model of how an online company has managed to generate a good revenue stream since its IPO. A lot of people – before the LinkedIn IPO – were quite unsure how this company was going to monetise itself. And that’s a big problem that these online companies have. Private people don’t really know how they make money. Most of them make it on the back of adverts and marketing. When it comes to LinkedIn, they’ve done a fantastic job in terms of signing up good relationships and deals with major corporates who now use LinkedIn as a way to network with their staff and a number of people in the public. It’s great for job opportunities and in general it’s a very solid system. The share price move, which is up around 435% since its inception, does reflect how confident the market is on LinkedIn and I think that’s a great model for these online companies who look to eventually list on the market.

ALEC HOGG: Well, it’s interesting. Just as a final question: Do you think that when Twitter does come to the market it’s going to be a Facebook or a LinkedIn as far as investors are concerned?

ISHAQ SIDDIQI: I think it has the potential to be more of a LinkedIn as opposed to a Facebook. I think it really depends on how Twitter management handles this. As I said, they have to be a lot more prudent and low-key. We don’t want the anti-climax situation that we had with Facebook. A lot of that is dependent on how much clarity the management can provide. I think, when it comes to Twitter as a business model, it’s got a good structure when it comes to news-flow and information and is able to delegate that appropriately. They have their ‘promote a tweet’ system. They have their analytical tool which many companies use – and users use – to understand what sort of engagement they have with their users and at the same time their advertising arm is getting stronger and stronger. They’ve recently purchased a company called MoPUB at the start of the week and that’s going to help them really push their mobile branding out.