Tomorrow is the big day. The social networking sensation, Twitter (NYSE:TWTR), officially goes public. Given the mania in the IPO market (seven IPOs have already doubled in price on their first day of trading this year), it’s safe to say that Twitter’s stock is going to soar too. At least, in relation to its offering price.
But who cares?! I mean, unless you’re a well-connected, high-net-worth client, you won’t be able to buy the stock at its proposed range of $23 to $25 per share. In turn, you won’t be able to flip your shares for a quick profit once trading begins, either.
No, as lowly retail investors, I’m afraid we’ll be forced to buy shares in the aftermarket if we want a piece of the action. Therefore, any discussion about the IPO’s prospects needs to focus on the long term, because buying and holding the stock is the only way we stand to profit. With that in mind, here’s a rundown on the major risks threatening the stock’s long-term performance.
They’re all “tweetable” (i.e., less than 140 characters). So after you’re done reading, start tweeting! After all, friends don’t let friends buy into IPO hype.
- Twitter IPO Risk #1: Facebook’s IPO flopped. But by its own admission, Twitter’s IPO is 45% riskier. Look out below!
An analysis by 24/7 Wall Street reveals that the Risk Factors section of Twitter’s IPO filing is almost 50% longer than Facebook’s (NASDAQ:FB). By its own admission then, Twitter is saying that its IPO is more risky. And that’s not good news for shareholders considering how Facebook flopped in the aftermarket.
- Twitter IPO Risk #2: Fake out alert! Research says Twitter has a lot more fake accounts than it’s willing to admit.
Based on Twitter’s estimates, “false or spam accounts” make up less than 5% of its monthly user base. I’m betting it’s higher than that though. Twitter is less popular than Facebook, yet it publicly discloses a higher fake user percentage at 7%.
Now, it’s impossible to generate sales and profits from fake users. So the higher the actual number of fake accounts on Twitter, the less upside potential the company – and, in turn, the stock – possesses.
- Twitter IPO Risk #3: Ron Burgundy and Facebook are kind of a big deal. But Twitter really isn’t according to @forrester.
It may seem as though everyone is on Twitter. But they’re not. Forrester Research estimates that only 22% of U.S. internet users are on Twitter. In comparison, 72% check Facebook at least once per month.
Bulls will swear this stat means Twitter has room to grow. I swear it means Twitter isn’t going to (and never will) go mainstream. And the next two risks prove it…
- Twitter IPO Risk #4: Doomed to be another MySpace? Even tweets from top celebrities can’t keep users engaged.
The Holy Grail for any social network is engagement. Twitter is failing miserably here. A recent Reuters / Ipsos poll found that a staggering 36% of people who joined Twitter don’t use it. In comparison, only 7% of users who sign up for Facebook said they don’t use it.
- Twitter IPO Risk #5: Forget just trending in the wrong direction, Twitter’s user growth can’t even keep up with Facebook.
Social media investments are all about the network. The bigger it gets, the more upside potential it will see. While Twitter’s user base is still growing, the rate at which it’s expanding keeps slowing down. Monthly active users increased 39% in the third quarter compared to the year-earlier period. That’s down from the 44% growth rate in the previous quarter – and the 65% growth rate in the previous year.
When Facebook was a similar size, it was growing more than three times as fast.
- Twitter IPO Risk #6: Contrarian indicator alert. Every single analyst who’s issued a pre-IPO report on Twitter rates it a “Buy.”
We all know that analysts routinely get it wrong. Almost as much as economists and weathermen. Accordingly, when they all agree about a particular stock, it’s usually in our best interest to do the opposite. And right now, they’re all buying into the Twitter IPO hype, issuing initial price targets as high as $50.
- Twitter IPO Risk #7: Stock prices always follow earnings, and Twitter doesn’t have anything but losses.
It’s not altogether a surprise that Twitter is unprofitable. Many startups go years before making a single penny. The problem here is that Twitter is headed in the wrong direction. In the first half of 2013, losses increased by 41% to $69.3 million. And that doesn’t bode well for share prices.
Bottom line: Twitter’s IPO promises to be anything but a compelling buying opportunity for long-term investors. Heck, at the high end of the pricing range, the company will trade at 13.6 times forward sales. That makes Facebook and LinkedIn Corporation (NYSE:LNKD) appear cheap at about 12 times forward sales.
If you’re absolutely dead set on putting new money to work in a social networking stock this week, you’d be better served to invest in one of those two stocks instead.