Sunday, December 1 marks the expiration of the SEC-enforced 25 day quiet period on underwriter research after Twitter Inc (NYSE:TWTR)'s November 6 IPO. The conclusion of the quiet period will permit the firm's extensive list of underwriters to unleash research reports into the market, likely leading to at least a brief increase in the price of TWTR shares.
Twitter's IPO beat its expected price range of $23-$25 per share at $26 per share, and posted an unsurprising first day return of 72.7% driven by a low-balled expected range and potent name recognition; the price of TWTR has since held steady between $39.40 per share and $50.09 per share. See our prior article.
Twitter's IPO underwriters will attempt to capitalize on the firm's widely-known brand with the release of mountains of positive information to the public at the conclusion of the quiet period. Twitter's huge roster of underwriters includes JP Morgan Securities LLC, Morgan Stanley & Co LLC, Goldman, Sachs & Co, Allen & Company LLC, BofA Merrill Lynch, Code Advisors LLC, and Deutsche Bank Securities Inc.
The past two years of our research have empirically evidenced a correlation between the quality and number of firms underwriting an IPO and the corresponding increase in share prices at the expiration of the quiet period. Several academic studies also support our thesis.
Studies by Professor Bradley for example have shown that:
"Initiated firms experience a five-day abnormal return of 4.1% for firms with coverage. The abnormal returns are concentrated in the days just before the quiet period expires". See this link for full study.
Since the increase in price generally begins to accelerate a few days in advance of close of the quiet period, as experienced investors realize that the underwriters will only release positive information about a firm that they recently underwrote. These advance buys create the perception of increased demand and place upward pressure on stock prices.
Over the past few weeks, we have experienced positive results to our former holdings in Western Refining (NYSE:WNRL), Plains Holdings (NYSE:PAGP) and Essent Group (NYSE:ESNT) for example from this quiet period expiration strategy. See recent articles here and here.
Twitter operates the well-known short-form social network that limits its users' posts to 140 characters, and is used both by individuals and organizations ranging from professional sports teams to the White House-a well-read (and politically correct) Twitter is considered critical from a modern PR standpoint. The firm has attracted an impressive 100 million daily active users and 230 million monthly active users worldwide; some 500 million Tweets are posted per day. However, Twitter is losing tremendous amounts of money, even for a firm that is still ostensibly in its growth phase; between the nine months ended September 30, 2012 and the nine months ended September 30, 2013, the firm's revenue showed a dramatic increase of 106% to $422.2 million, while net losses exploded to $133.9 million, a shocking 89% increase. Nonetheless, the firm continues to reward its executives with huge compensation packages, as detailed below.
Given the high and increasing losses that Twitter has experienced, CEO Richard Costolo's total compensation in excess of $11.5 million for 2012 seems more than a little ridiculous; additionally, President of Global Revenue Adam Bain's total compensation reached $6.7 million and Senior Vice President of Engineering Christopher Fry saw total compensation of $10.3 million. These outsized compensation packages lend credence to rumors of a poor corporate culture.
We view the upcoming Twitter quiet period expiration as a near term positive opportunity for aggressive traders.
The firm may still be overvalued at this point, and has been bolstered primarily by name recognition and growth prospects, meaning that the research reports released at the end of the quiet period will likely be widely read and have a significant but very temporary impact.
Until the firm's value has more firmly settled, we don't think that it makes sense as a long-term portfolio addition.
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.