The Twitter IPO

At the end of the week when Twitter went public, there was a sigh of relief at Goldman Sachs, the bank that led the IPO. Fittingly, the sigh was expressed in the form of a tweet ‘Phew’ by the lead banker, Anthony Noto.

The Facebook IPO drew attention to the dangers of social media companies going public. Social media companies are particularly difficult to analyze and value as generally speaking the value is based on an uncertain and hoped for future. Unlike conventional companies, it is unusual for a social media company to be showing a realistic profit that can be part of the pricing assessment.

Facebook showed these difficulties in an embarrassing public display. It was launched on the NASDAQ priced at $38 per share, and initial enthusiasm lifted this to $45. The price rapidly plummeted and only achieved the same levels again a year later.  Adding to its difficulties, NASDAQ, the original electronic  stock market for technology companies, had numerous technological glitches and delays.

Twitter chose to go instead to the New York Stock Exchange, unusually for a technological company, and the launch took place without a hitch. The IPO price of $26 was higher than earlier rumours, which had started in the range of $17-$20 and increased to $23-$25 on November 4th in response to public interest. But it was well chosen, allowing the element of profit for early share “flippers” as the price soared about 80%, closing at $44.90 by the end of the first day’s trading.

This shows the conflict that all IPOs face. The task is to raise as much money as possible for the company, but also to avoid the Facebook mistake that damages a company’s image to the public. Other tech stocks have had a similar ‘pop’ on their launch. For instance, LinkedIn also rose over 80% and the music provider Pandora went up 60% on launch.

The reason that this type of company is so hard to value is that it still has to make any type of profit. For a long time, Twitter seemed to be making little effort to gain revenue, avoiding the natural aversion that users have to ‘in your face’ advertising while it built a following. But now, with 230 million users, it may have to become more commercially inclined to satisfy shareholders.  However, Twitter as a company is currently loss-making and is expected to hit revenues of  $950 million in 2014 with no expected earnings until at least 2015.

The expectation now is that the price will consolidate down to about $30 per share, comfortably above the opening price. Barring unexpected announcements, there should not be any major shifts in value until the first earnings report.

Here is the first two days’ trading chart from IG: –

You can see the initial “pop” as well as the run up during the first day’s trading, followed by an uneventful second day. It looks like the price may gradually consolidate down until it finds a level that traders feel is justified. On this scale of chart (10 minute) all the candlesticks are relatively short, providing little indication of any strong market pressures.

With the first couple of days out of the way, you can spread bet on this stock on IG using your conventional indicators and strategies. IPO times and news times in general are more risky to trade, but present bigger opportunities for profit, and it depends on your personal propensity for risk whether you take a position on a stock during such volatile periods.

Update: It is January 2014 and Twitter is now trading at $69.00 with a market cap of 38.31 Billion!!  That’s quite a feat from the $26 IPO price.  Is this a sign of optimism of the expanding economy or does it have the clouds of a dangerous Tech Bubble 2.0 that may be lurking on the horizon?  Twitter isn’t even a profit-making enterprise having accumulated $300 million in losses over the last 3 years.  A 7 year old company is now valued more than much longer established enterprises like Alcoa, Harley-Davidson, and News Corp!