Twitter IPO Avoids The Facebook Pump And Dump

Oct.10.13 | About: Twitter, Inc. (TWTR)


As Twitter (NYSE:TWTR) prepares for a huge, potentially groundbreaking IPO, the company is analyzing lessons from Facebook's (NASDAQ:FB) controversial IPO experience. Dominating financial headlines in May 2012, Facebook's IPO was the largest in the history of online startup companies. Unfortunately, this IPO was widely seen as a cynical attempt to cash in on the enthusiasm of the investing public. Since Facebook was hugely profitable long before its IPO, selling Facebook shares was more about enriching early investors than providing new growth opportunities. Initially selling at a healthy $38 per share, Facebook's stock price lost almost half of its value in less than ten weeks. As a result, the IPO has been compared to a classic "pump and dump" stock scam. Government officials are still investigating whether Morgan Stanley acted improperly as the main underwriter for the IPO.


The investing public is developing a more skeptical attitude towards big, trendy technology IPOs. However, investors should take comfort in knowing that Twitter's IPO should bear little resemblance to the Facebook fiasco. For one thing, Twitter isn't a fully developed company simply seeking to enrich early investors. Instead, Twitter has a developing business model and has yet to fully prove itself. Indeed, Twitter is on track to lose $100 million this year on over half a billion in revenue. This is actually good news for investors, since it means that Twitter is a hungry company on the cusp of profitability. The company will use almost every investor dollar to develop a stronger, more profitable operation. Since the company went from zero revenues to $600 million in four years, the future looks bright for stable and growing Twitter profits.

To further differentiate itself from Facebook, Twitter will focus on building long-term relationships with shareholders. Like Amazon (NASDAQ:AMZN), Twitter has an extended plan for sustainable success. This is a far cry from Facebook's apparent willingness to exploit shareholders for immediate gain. By June 2012, Facebook had already gained almost a billion users. With such a dominating position, the company was nearly at the peak of its user growth cycle when it went public. In contrast, Twitter approaches its IPO with less than 250 million users, leaving plenty of room for future development.

Facebook faced enormous criticism for essentially dumping its shares on the market, offloading more than 15% of all shares on its first day of sales alone. This reckless behavior is almost guaranteed to produce rapid share price inflation and an eventual price crash. Twitter intends to show more prudence and sell only 10% of its overall share count. With its conservative sensibility, Twitter's IPO may closely mirror LinkedIn's (NYSE:LNKD) outstanding initial offering. That company doubled its share price over its first day of trading and gained 160% more over a few short months.

Of course, there is no question that Twitter will face many growing pains in the years ahead. For all of its popularity, Twitter is more specialized than Facebook and has a far greater proportion of completely passive users. Less fully engaged, many of these casual Twitter readers may eventually abandon the company for newer, trendier networks. Fortunately, Twitter is set to use the IPO process as a springboard for profitability, not as a golden parachute to fund stagnation and decline.

For a successful IPO that leaves private investors and new shareholders equally satisfied, Twitter will need to take a few crucial precautions. Firstly, the company must take great pains to avoid technical problems on its opening day. Facebook's IPO stymied the public through countless technical glitches that caused enormous frustration for investors. These glitches affected both buying and selling and left many people in doubt about whether their transactions had cleared with NASDAQ. Though it is still unclear which stock exchange will host Twitter's initial offering, it is safe to say that the startup is leaning towards utilizing the New York Stock Exchange. Of course, NASDAQ chief Bob Greifeld is doing all he can to make it clear that his organization has learned from past failures. Though that may be true, the poor cosmetics of following in Facebook's footsteps could steer Twitter away from the Chicago exchange.


To avoid Facebook's fate, Twitter will have to forge ahead with caution and extreme attention to detail. Though the company has had some success in associating its announced IPO with the positive example of LinkedIn, the Facebook story has cast a definite pall over the future of social network IPOs. Twitter will need to increase its revenues quickly in order to cement any gains from a successful IPO. In the next few months, Twitter executives will need to focus on deliverables to avoid once again souring the public on Internet startup stocks.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.