Twitter (TWTR) has been "trending" very well since its IPO. Almost two months after its IPO in November 2013, the stock is still moving up and down heavily like there is no tomorrow. Check out two recent market currents on SA about this, here and here.
In this frenzy, the upcoming lock up expiration is almost forgotten. The following points are taken straight from Twitter's SEC filing:
- 87% of its total shares are still in the lock-up period, meaning they cannot be sold by insiders at least until February 2014.
- As early as February 15th, about 10 million more shares will become eligible for selling by non-executive insiders.
- Around May 15th, the entire 87% of shares mentioned above held by all insiders (executives and non-executives) will become eligible for selling.
- As this article says, not many seem to be noticing the impact of lock up expiration. The writer noted that Twitter was valued at a "rich" $15 billion. Hold you breath, right now it is valued at $37 billion. Is there a word beyond "richest?"
We wrote this piece in July 2012, a month before Facebook's (FB) lock up expiration. The article illustrated how the new issues were pressurized in the days leading up to the expiration and suggested that average retail investors stay very clear of these stocks. Sure enough, Facebook lost close to 30% in the run up to the lock up expiration date.
Now with Twitter approaching its expiration date, we have recompiled the table below with the latest data so people can draw their own conclusions.
(Source: Table compiled with data from Yahoo Finance. Please note that the "Opening Price" column lists the price when the stock started trading for the common investors - not the IPO price.)
- The performance till lock up period (except Twitter) and on the lock up date for all these stocks was dreadful. No, this is not cherry picking the stocks as all these are well known social media stocks that went public recently.
- LinkedIn (LNKD) stands out from this entire group and we debated if that might have to do with LinkedIn's position/image as a professional networking site and lesser reliance on advertisements. LinkedIn also has a better visitor to lead conversion rate than Facebook and Twitter. That said, the valuations are still extremely dizzy for LinkedIn.
- Even though Facebook did not experience a fall right on the expiration date as the others did, the stock lost about 30% in the one month leading to the lock up expiration as short sellers began to assemble. And though Facebook has returned to the positive side when compared to the opening price, one might have experienced the same returns by just holding an index fund through 2012 and 2013 at a much lower risk.
- Has the market mood helped Twitter?: It cannot be denied that the overall market mood has been much more positive in 2013/2014 than it was in 2011/2012 when the other companies listed above were approaching their lockup expirations. However, if the market's buoyancy took Twitter to the top, it won't take long for it to come back down in a wave of negative sentiments either.
- Twitter's Market cap Anomaly: To put Twitter's market cap into perspective, it is higher than proven businesses like Yum Brands (YUM) and Chipotle Mexican Grill (CMG). Sure, the comparison might be like Apples Vs. Oranges but it is hard to deny the truth in numbers comparison (earnings per share, profits etc). If you need more numbers to realize the extent of overvaluation, Twitter is now larger than 80% of the S&P 500 companies in terms of market cap.
Conclusion: In the frenzy over growth potential, a simple but forgotten fact is that the often ridiculed PE represents the number of years it takes for the company to earn your investment back through operations. Three out of these five stocks do not have a PE yet (AKA losing money) and the one of two stocks with earnings has a PE of almost 1000.
We expect Twitter to be pressurized to the downside going into the lockup expiration and even beyond that. The stock might well double in 2014 and make us look ridiculous but we would like to conclude the article by quoting the following to drive home the message:
"Men, it has been well said, think in herds. It will be seen that they go mad in herds, while they only recover their senses slowly, and one by one." ~ Charles McKay, Extraordinary Popular Delusions and the Madness of Crowds
Will you be the first to recover? Or the last to go mad ? Or one who is staying out? We are in the last category.