What’s Wrong With Twitter Inc’s IPO?

This is a fantastic time for Twitter Inc (NYSE:TWTR) to go public, yet…

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

A version of this article first appeared on Fool.com

WASHINGTON, DC –Twitter (NYSE: TWTR.US) has priced its shares at $26 each, more than the $23-$25 range initially announced due to high demand, making it the biggest market debut for a technology firm since Facebook (NASDAQ: FB.US).

If you want any evidence that Facebook’s botched May 2012 initial public offering was a traumatic event, just look at the following headlines regarding the most anticipated IPO since the “Facebook fiasco”, which I culled from Yahoo! Finance’s homepage:

Challenges abound for Twitter heading into the IPO (Associated Press)

Success of Twitter’s Business Model Questioned Ahead of IPO (Breakout/Yahoo! Finance)

As Twitter IPO prices, poll says it’s not worth hype (CNBC.com)

Good News for Twitter IPO: Small Investors Are Skipping It (The Exchange/Yahoo! Finance)

But who, exactly, was traumatised? Investors or financial journalists? One headline tells a different story from those I just cited — one of enthusiasm, rather than scepticism:

Twitter boosts IPO range amid strong investor demand (Reuters)

Although they maintained the size of the offering at 70 million shares, Twitter and its underwriters first raised the previous $17 to $20 pricing range for the stock to $20 to $25, before today’s “$26” news. If the underwriters exercise the overallotment option for an additional 10 million shares, Twitter will end up raising more than $2 billion at the top end of that range.

The truth is that this is a fantastic time for Twitter to go public: the stock market has had a great run this year and growth-stock IPOs have been making eye-popping debuts (in the US, witness the shares of sandwich chain Potbelly, which more than doubled on their first day of trading, and we all know the score with Royal Mail by now). Finally, the most highly visible social networking stocks — Twitter’s peer group — have outpaced the market, as the following performance graph of Facebook and LinkedIn illustrates:

FB Chart

FB data by YCharts

With those precedents in mind, should investors ignore the sceptical articles regarding Twitter and plow into the stock? My answer: no.

Where Facebook and LinkedIn are solidly profitable, Twitter isn’t. In that regard, it’s closer to local-business review site Yelp, which has yet to turn a quarterly profit (although that hasn’t stopped the stock from gaining 241% this year.) Twitter is a fascinating platform, and it has already made a massive impact on business and popular culture, but as a business model, it’s still finding its feet. Several ad buyers at major advertising firms recently told the Financial Times that the funds they allocate to Twitter come out of their “experimental” budgets.

I think the odds are excellent that Twitter’s stock will post muscular gains once the shares begin trading, but whether it will prove an excellent long-term investment looks much more uncertain. Investors who are interested in buying the shares should first ask themselves what they expect to achieve, over what timeframe… and how much they are prepared to lose in an adverse scenario.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

> Alex has no position in any stocks mentioned

More on Company Comment

Hand of person putting wood cube block with word VALUE on wooden table
Company Comment

Value has been building behind the Diageo share price

Despite the business growing, the Diageo share price first reached its current level just over 19 months ago and hasn't…

Read more »

Older couple walking in park
Investing Articles

5 stocks to buy for high and rising dividend income

I can see a host of shares to buy on the FTSE 100 offering me exceptional levels of income. Here…

Read more »

Young mixed-race woman looking out of the window with a look of consternation on her face
Investing Articles

I don’t care if FTSE 100 shares fall further, I’m buying them today

I'm happy to go shopping for FTSE 100 shares today, even though I accept that they could have further to…

Read more »

Happy young female stock-picker in a cafe
Investing Articles

Rolls-Royce shares are down 18% in a month and I’m finally going to buy them

Investors who bought Rolls-Royce shares have been repeatedly disappointed, but I'm willing to take a chance on them before they…

Read more »

Storytelling image of a multiethnic senior couple in love - Elderly married couple dating outdoors, love emotions and feelings
Investing Articles

How I’d invest £10k in a Stocks and Shares ISA today

Now looks like a good time to buy cheap FTSE 100 shares inside a Stocks and Shares ISA. These are…

Read more »

Black father holding daughter in a field of cows
Investing Articles

Today’s financial crisis is the perfect moment to buy cheap shares

I'm building a portfolio of FTSE 100 stocks by purchasing cheap shares whenever I see an opportunity. There's a good…

Read more »

Long-term vs short-term investing concept on a staircase
Investing Articles

I’d buy Tesco shares in October to bag their 5.4% yield 

Tesco shares have fallen lately but I think this makes them attractively valued for a dividend stock I would aim…

Read more »

Young mixed-race woman looking out of the window with a look of consternation on her face
Investing Articles

I would do anything to hold Diageo in my portfolio (but I won’t do that)

Diageo is one of my favourite stocks on the entire FTSE 100 and I'd love to hold it, but one…

Read more »