Twitter (TWTR) finally IPO'd Thursday priced at $26 per share, opening over $45 per share and finally closing at $44.90 per share up 73% - a market capitalization over $24B. Over 113M shares traded hands. Insiders cashed out enough to create 3 new billionaires and a large flock of new millionaires. However, retail investors who are interested in investing in Twitter would be wise to wait a while and let the dust settle for several reasons.
Look At Recent Similar IPOs
One only needs to look back at the recent Facebook (FB) and Groupon (GRPN) IPOs to see what happens when the market gets whipped into an over-exuberant frenzy, about the latest greatest sensation, then feels the sting of post IPO drop to know why waiting is the best strategy. A quick review of the Facebook and Groupon post IPO graphs will illustrate why investors should wait and let the market calm down.
Look At The Market Cap
Consider that after its first day of trading, Twitter is now sporting a nearly $25B market capitalization. Compare Twitter's market cap to some other technology companies you may have heard of...
Micron (MU) - $18.31B
ARM Holdings (ARMH) - $21.31B
Corning (GLW) - $23.71B
Dell (DELL) - $24.39B
Adobe (ADBE) - $26.8B
It is absurd for a company that doesn't make a dime and hasn't really defined how it is going to monetize its 250M user platform has a market cap higher than any of the above listed companies. I understand the market is a forward-looking mechanism and pricing for the future, but oftentimes during IPOs and other times of over-exuberance (like the dot.com boom/bust) share prices get ahead of the actual prospects of the company. I believe Twitter's shares will fall as the excitement dies down and people realize it could be many years before Twitter will generate enough profits to justify a market cap of nearly $25B.
Do You Trust The Information?
It appears that once again, just like with the Facebook IPO, main street investors are being fed a different and rosier outlook than the high paying clients of the investment bankers running the IPO. From an article by Fortune today:
According to the Wall Street Journal, analysts who work for Goldman Sachs (GS) and other banks on the IPO, which raised $1.8 billion, have been privately telling select investors that Twitter's revenue may not increase as fast as expected. The underwriters' analysts are predicting 55% growth next year. The rest of the Street is estimating 80%. For the following year, it's 32% vs. 58%. That's a huge difference for a company like Twitter that is not yet profitable and being judged mostly on its ability to grow.
Twitter may end up being wildly successful and actually deserving of a $25B market cap, but right now it isn't. I predict Twitter's share price will fall in the coming months, just like Facebook and Groupon shares did post IPO, as the hype wears off and investors actually lift the hood and see the operating results.
Additional disclosure: This article is informational and intended to spur thought and discussion. This article is NOT a substitute for your own extensive due diligence and does NOT qualify as investment advice. DO NOT BUY OR SELL STOCKS BASED ON THIS ARTICLE.