11/7/2013 5:45 PM ET|
Twitter IPO is investing at its worst
The buzz over Twitter's IPO reflects investors' very worst instincts -- putting too many eggs in one basket, following the herd and getting caught up in the euphoria of the moment.
Wall Street is all a-twitter over the initial public offering of Twitter (TWTR).
The shares opened at an astonishing $45.10 a share Thursday. The IPO was priced way above initial indications at $26 a share. The offering was massively oversubscribed, with buying interest at maybe 10 times the number of shares.
And amid the tsunami of media coverage -- much of it discerning and critical -- some individual investors are trying to get a piece of the dream. If you're one of them, I have one word of advice: don't.
Not that Twitter is a bad company; it has a lot of potential, though it's far from realizing it.
Nor do I think this IPO will rip off investors the way last year's Facebook (FB) fiasco did; Twitter, the underwriters and the New York Stock Exchange have made a big effort to prevent that.
And unlike Facebook, whose IPO let big shareholders cash out big time, Twitter has dedicated the offering's proceeds to "general corporate purposes, including working capital, operating expenses and capital expenditures…[and possibly] to acquire businesses, products, services or technologies," according to its S1 offering statement.
In short, the Twitter IPO is doing what IPOs are supposed to do: raise money to grow the company and establish a public market for its shares. And it comes after an earlier wave of social-networking stocks have racked up huge gains.
But it's not your job to help Twitter raise capital or to help institutions make quick profits on their Twitter shares.
In fact, the buzz over the Twitter IPO reflects investors' very worst instincts -- putting too many eggs in one basket, following the herd, and getting caught up in the euphoria of the moment.
First of all, buying any individual stock is problematic, unless you're investing a small part of a widely diversified portfolio. And I have a sneaking suspicion that's not the case with people clamoring to buy Twitter.
We've all seen what market risk can do to our portfolios; Twitter adds risk on steroids, as the 32 pages of risk factors in its prospectus spell out. (How many prospective Twitter investors have actually read that document? Very few, I'd guess.)
And buying an individual stock at an IPO or immediately afterward is particularly dicey. Twitter just completed a "roadshow" in which its executives and underwriters pitched the offering to big mutual funds, pension funds, etc. These are closed-door meetings for the big-money crowd, no media allowed. You're not invited, either.
At those meetings, Twitter's bankers reportedly shared internal projections about revenues and operating earnings with the assembled money managers -- projections I couldn't find in the aforementioned offering statement.
That's not unusual at IPO roadshows. But it points to a certain, ahem, informational advantage for the big institutions. Based on that information, some of them passed on the deal. Those who did buy in got shares for less than you'll pay when Twitter starts trading.
In response to my inquiries, Twitter's spokesman referred me to the New York Stock Exchange, while underwriter Morgan Stanley (MS) declined comment. Lead underwriter Goldman Sachs (GS) didn't get back to me.
Twitter's IPO also comes amid a wave of enthusiasm, even irrational exuberance, for Internet and social-networking stocks reminiscent of the late 1990s. Facebook is up about a third from its first-day closing price. LinkedIn (LNKD), which went public a year earlier with much less fanfare, has risen more than 130 percent.
On Monday The Wall Street Journal reported that October was "the busiest month for U.S.-listed IPOs since 2007" and that "investors increasingly are willing to roll the dice . . ." Sixty-one percent of these companies lost money in the 12 months before the IPO, according to IPO expert Jay Ritter of the University of Florida — "the highest percentage since 2000." Roll the dice, indeed.
Twitter lost $69.3 million in the first half of 2013 and may not make money for another couple of years. USA Today reported that Twitter's bankers told roadshow attendees the company could take in $1.24 billion in revenue and $200 million in earnings before interest, taxes, depreciation and amortization (EBITDA) in 2015. That's EBITDA, not net earnings. And those are projections, nothing more.
The IPO price valued Twitter at $18.1 billion, including shares likely to be issued to employees. But at Thursday's opening, Twitter's market capitalization was above $30 billion. So, investors are valuing Twitter at 25 times estimated 2015 revenues and at more than 150 times projected 2015 EBITDA. That's not nosebleed territory; it's like hanging on to the wing of a Boeing (BA) Dreamliner.
Is it any surprise Max Wolff of ZT Wealth called Twitter's profit-free IPO "an emotional event, not a fundamental event"?
If you still must buy Twitter stock, then use no more than 5 percent of your equity money and wait a few months. These stocks eventually sell off: Facebook fell to $18 a share last September from its $38 IPO price. It has traded close to $55 recently.
Or better yet, buy an ETF like the FirstTrust US IPO Index (FPX), which invests in top-performing IPOs and has a good long-term track record. (I own a small amount in my IRA.)
But whatever you do, don't let your emotions get the better of you. Don't buy Twitter stock now. Please.
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Well said. Like Facebook, both of these company's future depends on young folks -- at least that's what their clients, the advertisers decide. But young folks are a most fickle bunch. They take things in and out of style just like their clothes. Data shows that social media is not immune to their fickleness. Facebook use among this most important audience is falling rapidly. It's so 2011 to them. I agree with the data. I have five children, and they and their friends are "like so over it" ;)
Full disclosure: I'm short Facebook and now Twitter and sleeping like a baby :)
124....21..The people or institutions that managed to get shares last night on the offering price of $26, plus the underwriters and some owners/employees, received a gain of 75-80%, if they sold??
Which I'm sure they did..
By around noon or so, there were 80 million shares traded already, but "only" 70 million had been offered for the day,by the underwriters and others(the company?) I think..??
The people that paid $50 per, may have got caught holding a bag of shidt...Check tomorrow.
I will never Invest in any company until I see a sustained Profit and Solid Business Model -
I'm an Investor - not a speculator.
How can a stock open at $45.10 and close at $44.90 and be up 72.69% looks more like a .20 cent a share lose to me.
It sounds like what my uncles calls Portuguese math and even split would be......10 for me and 1 for you.
How stupid do they think we are?
For the foreseeable future, the only chance of a return on Twitter is for the price of the stock to continue to rise. For anyone who managed to buy at $26 that prospect probably seems almost certain and safe. But, it’s important to also recognize that someone paid $50 for the stock today and now sits on a 10% loss in one day. That could be you tomorrow. Imagine that. Better yet, tweet it to someone who paid $45.
P.S. That guy who bought at $50 is now dying to sell at that price and get his money back. So why would anyone pay a penny more until he does?
Interesting. According to the byline this article was published almost 3 hours after I read it. Am I traveling in time?
Do your homework before putting money in anything.
Unless the money is gambling or speculation willing
to win/make or just Lose.
Market even with the high/lows have made more $$$$
than any of the others for me.
twitter hasn't had a profit since its inception...so what do they do to make some money? go public...great move on their part...not so great for anyone holding onto to this time bomb for more than a day. The media hype is over and so is the stock from here on out. Take your money and run.
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