Money Morning Article of the Week
by David Zeiler, Associate Editor, Money Morning
With the Twitter stock IPO now official as of today (Thursday), the inevitable comparisons to Facebook Inc. (Nasdaq: FB) and its disastrous IPO no doubt will accelerate.
According to the SEC filing, Twitter will trade under the symbol TWTR, though no exchange, pricing, or share information was listed.
But the Twitter stock IPO – which is on track to start trading sometime late this month or in early November – does not figure to have a lot in common with the Facebook IPO other than that both are social media stocks.
In fact, many experts blame the rocky Facebook stock offering and its months of subpar performance for the delay in the Twitter stock IPO.
Facebook quickly fell below its offer price of $38, eventually sliding as low as $18 until starting to climb back up. In August of this year – 15 months after the IPO – Facebook finally surpassed its offer price.
And then there was the trouble on the day of the IPO, when technical glitches delayed trading of the shares for two hours.
But in recent months, Facebook’s strong recovery – it’s currently trading at about $50 and could go much higher if its mobile ad revenue continues to increase – seems to have cured the hangover that had put other social media stock IPOs on ice.
Click to enlarge
In fact, many social media stocks have had a very strong 2013, making the atmosphere for a Twitter stock IPO just about ideal.
In addition to Facebook (up 89% year to date), LinkedIn Corp. (NYSE: LNKD) is up 119% this year, Yelp Inc. (NYSE: YELP) is up 278%, Pandora Media Inc. (NYSE: P) is up 194%, and even oft-criticized Groupon Inc. (Nasdaq: GRPN) is up 142%.
But like Facebook, nearly every social media stock has proven to be volatile, with most spending long periods below their IPO price.
Clearly, mistakes have been made when it comes to social media IPOs.
Kevin Landis, whose Firsthand Technology Value Fund has a substantial stake in the San Francisco social media company, told the Los Angeles Times that –
“Certainly the crew at Twitter has had ample opportunity to study recent history and draw whatever lessons they can from it.“
Here are five reasons the Twitter stock IPO will not suffer the same fate as Facebook’s…
Why the Twitter Stock IPO Won’t Implode Like Facebook’s
- Avoiding the Circus: Twitter set the tone early on how it planned to handle its IPO when it tweeted the announcement that it had confidentially filed its documents with the Securities and Exchange Commission (SEC). Twitter took advantage of a new law that allows companies with less than $1 billion in annual revenue to keep its financial data private until it starts to market its stock. Compare that to Facebook’s flashy event, which revealed all the company’s financial details months ahead of time. Each subsequent announcement heightened the scrutiny and added to the pressure as analysts began to question Facebook’s business model. Twitter’s approach gives it more control over how it will be perceived in the marketplace and gives it ample opportunity to educate potential investors on how it plans to make money.
- Not a Second Time: Twitter will benefit from Facebook’s Nasdaq troubles because no exchange or investment bank on Wall Street wants to endure that kind of confidence-destroying embarrassment again. It’s rumored that Twitter will choose the New York Stock Exchange over Nasdaq based on the Facebook fiasco, but no matter which exchange gets the listing, it will take great pains to ensure the IPO goes smoothly. The same will hold true for the investment banks involved.
- Smaller Is Better: Facebook CEO Mark Zuckerberg resisted going public because he was wary of the pressure that came with it. But after eight years in business Facebook had become a very large company, complicating its offering and reducing the potential for growth that new investors look for in an IPO. While Twitter is 7 years old now, it only generated significant revenue in 2010. And Twitter’s revenue, which research firm eMarketer estimates was about $288 million in 2012, is far lower than Facebook’s revenue of $3.7 billion posted in 2011, just prior to its first IPO filing with the SEC. Simply put, Twitter is going public at a point where it has much more room to grow, a key attraction for many investors.
- The Price Is Right: A desire to get the maximum payout upfront led Facebook and its advisers to capitalize on the hype and push the offer price well beyond where it belonged. That was a major reason Facebook stock struggled for so long afterward. You can bet that the Twitter stock IPO will not be priced anywhere near as aggressively, which should help it avoid slipping below its offer price for months on end.
- No More Than Necessary: Another of Facebook’s blunders was to increase the number of shares being offered right before the IPO. The excess shares not only contributed to Nasdaq’s technical woes, but also helped undermine the price later on. The float for the Twitter stock IPO will be much more in line with demand, which should serve to prevent the sort of steep declines we’ve seen in other social media offerings.
Whether the Twitter stock IPO will be a buy or not will depend on what’s revealed in the company’s SEC filings, expected to be made public within the next few weeks.
But when the marketing machine kicks into overdrive, investors need to keep their emotions in check and resist buying the Twitter stock IPO (or any other social media IPO) purely on hype or because it’s part of what Wall Street groupthink thinks is a “hot sector.”
Still, the Twitter stock IPO bears watching, as it should get a lot of things right.
Scott Sweet of IPO Boutique told MarketWatch that -blockquote>
“I very much anticipate a strong debut for Twitter. I believe Twitter would have learned from Facebook’s early mistakes.”
Note: The Twitter stock IPO may be the most visible IPO coming to the market in the next few months, but there are several others that look just as promising, if not more so. Here are eight upcoming IPOs that should be on every investor’s radar…
Related Links:
- Money Morning:
Will Twitter Stock Be a Good Buy? - Money Morning:
Don’t Feel Bad If You Miss Out on the Twitter Stock IPO - Los Angeles Times:
Twitter Drawing on Lessons Learned from Facebook IPO - Forbes:
Why Twitter’s IPO Won’t Be Like Facebook’s IPO
