Twitter's sexy IPO is a trap for average investors

The social media company holds no patent on its technology and doesn't produce a thing. Without users and content, it's worthless.

By MSN Money Partner Oct 25, 2013 2:07PM
Man using phone in front of a Twitter logo © Chris Ratcliffe/Bloomberg via Getty ImagesCNBC on MSN MoneyBy Todd M. Schoenberger, founder of LandColt Capital LP

I'm fully expecting that dude from ABC's "The Bachelor" to show up on one of the financial news channels next week and say something like, "The most anticipated initial public offering EVAH is about to hit Wall Street." Of course, the same thing could've been said about another all-awesome IPO in the spring of last year.

All the talk these days on Wall Street is about Twitter. Traders are going on Twitter, to talk about Twitter, and debate whether an allocation is warranted in Twitter.

For those living in a cave, let me bring you up to speed: The social networking giant, Twitter, is going public. The company is expecting to sell 70 to 80 million shares at a price somewhere between $17 and $20 per share. Early indications are the company should post on the high end of the range, closer to $20, which would mean it should be able to raise between $1.4 to $1.6 billion. The offering is expected to price on Nov. 6.

Any way you slice and dice it, Twitter is the hottest IPO since Facebook (FB) went public in May 2012.

That kind of euphoria, however, typically brings a lot of naysayers to the table. For instance, Wall Street analysts will be quick to point out that Twitter has about 545 million shares outstanding. So, with an IPO price tag of $20 per share, the company will be valued at about $11 billion. Not bad considering all Twitter really does is provide a portal for people to key in 140 characters about, well, anything.

The company doesn't produce a thing. It's purely tech driven and its only business is you, the user. Without users and content, Twitter is worthless. Yet, the company has successfully inked deals with many of the planet's largest corporations, including the NFL, to advertise to its user base.

And, this is what makes Twitter soooooo vulnerable. The company doesn't have a patent on its technology; because, let's be honest, the technology isn't exactly robust and cerebral. Plus, it doesn't take a tremendous amount of intellectual effort to key in a brief sentence or upload a picture. But the limitation of 140 characters is interesting because anybody can create a competitor with a jazzy look-and-feel website (and a nifty logo) and do the exact same thing. And don't tell me you haven't thought about it (I know I have).

And this is the exact reason why Twitter doesn't regulate against its "fake" users. Yes, believe it or not, some people like to create false Twitter accounts and make themselves even more anonymous while posting flip comments about people, places or things. The most recent confirmation about a fake user was Jofi Joseph from the Obama Administration who liked to post uncivilized comments about his colleagues. Ouch!

But guess what, Twitter doesn't care. It needs eyeballs to survive, so if you have someone writing something salacious, then so be it. I'm not breaking any news here, but eyeballs equal ad revenue.

So when calling the family broker and submitting an indication of interest for some shares of TWTR, just remember to remain cautious. Without the patent protection, anybody with a computer and a creative streak can quickly launch a competitor. I'll keep you posted if I decide to create my own site. Of course, I'll be sure to announce it on Twitter.

More from CNBC:

Oct 25, 2013 3:00PM

Oh goodness!  You mean "twitter" is an elastic demand concept?  First an article this week that Facebook has lost it's luster and now a groundbreaking  revelation that "twitter" is a fad.  Sort of like "beanie babies," correct?


[.... emphasize obvious sarcasm...]

Oct 25, 2013 2:22PM

Where would young be if they couldn`t tweet about all those important things they`re doing

and thinkin?

Nov 5, 2013 12:00PM
And yet... zombie fund executive after zombie fund executive apparently revel in their "business plan"? What's it all about Ivy League? It sustains on ads from other virtuals, makes nothing, IS nothing and IBM has challenged it's technology. If ONE PENNY on QE invests in it, that would be terrorism. LET'S PULL THE PLUG...
Oct 27, 2013 7:16PM
Twitter has to stay in business, otherwise how would leading Republican intellectuals like the quitter and gold digger Palin, the drug abuser Limbaugh, and the man who proves you can go to Harvard and still become Joe McCarthy, Ted Cruz, EVER be able to give their comprehensive philosophies to the masses?  
Oct 25, 2013 2:57PM
Todd, you are absolutely right, there are no barriers to folks doing exactly what Twitter has done. So why haven't they. I personally feel it's over-hyped and overrated. My feelings have never stopped stocks from soaring or falling. Fact of the matter is this. They have a Billion Dollar Line of Credit plus upcoming Dollars from the IPO. They also have Time put in for innovating this type of Social Media. To mimic it, others will have to go through their own Growing Pains and build Business Relationships. If it was so easy, everyone would be doing it.

Sometimes the only thing that has stopped others from doing the same is the lack of Access to Capital. Anyone could open a Restaurant if you give them the Money. That hardly means they will be successful. Same for Twitter type entities. But Todd I see your point there. Will we see competitors, certainly, however until then, the HYPE around this will only grow. Can't wait to see how it trades the first day.

Nov 5, 2013 12:43PM

"The social media company holds no patent on its technology and doesn't produce a thing. Without users and content, it's worthless."


YES!!!!!  Geez.... finally with a brain in their head!!!!!!!

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