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Twitter IPO is Investing at its Worst
11/07/2013 12:00 pm EST
The main topic on most every investor's mind is, of course, the Twitter IPO, which started traded Thursday. However, MoneyShow's Howard R. Gold thinks rushing into an investment right away, might turn out to be a mistake you can't afford to make.
Wall Street is all a-twitter over the initial public offering of Twitter (TWTR), the microblogging site which started trading Thursday.
The shares opened at an astonishing $45.10 a share Thursday. The IPO was priced way above initial indications at $26 a share, raising $1.8 billion for the seven-year-old company. The offering was massively oversubscribed, with buying interest at maybe ten times the number of shares.
And amid the tsunami of media coverage—much of it discerning and critical—some individual investors are trying to get a piece of the dream.
If you're one of them, I have one word of advice: don't.
Not that Twitter is a bad company; it has a lot of potential, though it's far from realizing it.
Nor do I think this IPO will rip-off investors the way last year's Facebook (FB) fiasco did; Twitter, the underwriters, and the New York Stock Exchange have made a big effort to prevent that.
- Read Howard's commentary on four
reasons the Facebook IPO fizzled on MoneyShow.com.
And unlike Facebook, whose IPO let big shareholders cash out big time, Twitter has dedicated the offering's proceeds to “general corporate purposes, including working capital, operating expenses and capital expenditures…[and possibly] to acquire businesses, products, services or technologies,” according to its "S1 offering statement".
In short, the Twitter IPO is doing what IPOs are supposed to do: raise money to grow the company and establish a public market for its shares. And it comes after an earlier wave of social-networking stocks have racked up huge gains.
But it’s not your job to help Twitter raise capital or to help institutions make quick profits on their Twitter shares. It's your job as an investor to grow your wealth over time to meet your long-term financial goals. And trendy IPOs like Twitter are exactly the wrong way to do that.
In fact, the buzz over the Twitter IPO reflects investors' very worst instincts—putting too many eggs in one basket, following the herd, and getting caught up in the euphoria of the moment.
First of all, buying any individual stock is problematic, unless you're investing a small part of a widely diversified portfolio. And I have a sneaking suspicion that's not the case with people clamoring to buy Twitter.
We've all seen what market risk can do to our portfolios; Twitter adds risk on steroids, as the 32 pages of risk factors in its prospectus spell out. (How many prospective Twitter investors have actually read that document? Very few, I'd guess.)
And buying an individual stock at an IPO, or immediately afterward, is particularly dicey. Twitter just completed a roadshow in which its executives and underwriters pitched the offering to big mutual funds, pension funds, etc. These are closed-door meetings for the big-money crowd, no media allowed. You're not invited, either.
NEXT: Behind closed doors at the roadshows|pagebreak|
At those meetings, Twitter's bankers reportedly shared internal projections about revenues and operating earnings with the assembled money managers—projections I couldn't find in the aforementioned offering statement.
That's not unusual at IPO roadshows. But it points to a certain, ahem, informational advantage for the big institutions. Based on that information, some of them passed on the deal. Those who did buy in got shares for less than you'll pay when Twitter starts trading.
In response to my inquiries, Twitter's spokesman referred me to the New York Stock Exchange, while underwriter Morgan Stanley declined comment. Lead underwriter Goldman Sachs didn't get back to me.
Twitter's IPO also comes amid a wave of enthusiasm, even irrational exuberance, for Internet and social-networking stocks reminiscent of the late 1990s. Facebook is up about a third from its first-day closing price. LinkedIn (LNKD), which went public a year earlier with much less fanfare, has risen more than 130%.
- Read Howard's earlier piece predicting Dot.com
Boom 2.0 on MoneyShow.com.
On Monday, The Wall Street Journal reported that October was “the busiest month for US-listed IPOs since 2007” and that “investors increasingly are willing to roll the dice…” 61% of these companies lost money in the 12 months before the IPO, according to IPO expert Jay Ritter of the University of Florida—“the highest percentage since 2000.” Roll the dice, indeed.
Twitter lost $69.3 million in the first half of 2013 and may not make money for another couple of years. USA Today reported that Twitter's bankers told roadshow attendees the company could take in $1.24 billion in revenue and $200 million in earnings before interest, taxes, depreciation, and amortization (EBITDA) in 2015. That's EBITDA, not net earnings. And those are projections, nothing more.
The IPO price valued Twitter at $18.1 billion, including shares likely to be issued to employees. But at Thursday’s opening, Twitter’s market capitalization was above $30 billion. So, investors are valuing Twitter at 25 times estimated 2015 revenues and at more than 150 times projected 2015 EBITDA. That’s not nosebleed territory; it’s like hanging on to the wing of a Dreamliner.
Is it any surprise Max Wolff of ZT Wealth called Twitter's profit-free IPO "an emotional event, not a fundamental event”?
If you still must buy Twitter stock, then use no more than 5% of your equity money and wait a few months. These stocks eventually sell-off: Facebook fell to $18 a share last September from its $38 IPO price. It has traded close to $55 recently.
Or better yet, buy an ETF like the FirstTrust US IPO Index (FPX), which invests in top-performing IPOs and has a good long-term track record. (I own a small amount in my IRA.)
But whatever you do, don't let your emotions get the better of you. Don't buy Twitter stock now. Please.
Howard R. Gold is editor at large at MoneyShow.com and a columnist for MarketWatch. Follow him on, yes, Twitter @howardrgold. The World MoneyShow London starts tomorrow, but there's still time to find out more information and register for FREE! Click here...
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