What is the Twitter IPO?
An IPO is an Initial Public Offering. It’s the first sale of stock by a private company to the public—that’s why it’s also called taking a company public. IPOs are often issued by smaller, younger companies who are seeking capital to grow, but that’s not always the case, like with Twitter’s much-anticipated IPO.
Twitter’s plan to sell 70 million shares will be the biggest technology IPO since Facebook went public last year. In a regulatory filing, Twitter set a price range of $17 to $20 per share for its offering. At the $20 share price, Twitter would be valued at over $12 billion. The company is expected to set the price on Wednesday and begin trading Thursday morning.
So can the everyday investor get in on the Twitter IPO?
Yes and no. It’s historically been difficult for retail investors to participate in an IPO, because one immediate goal of the IPO is to raise money from institutional investors, known as underwriters. You typically need to be a frequently trading client with a large account with one of the underwriters to buy in on a hot IPO. And Twitter is about as hot as it gets: It’s a hot stock in the hot social-media sector of the hot tech market.
Why would a casual retail investor want to buy an IPO and should they?
Well, the answer to the “why” question would be to get in on the ground floor right?
Yes, that’s what everyone says! But that’s a common misperception. The truth is that by the time a company goes public, people aren’t buying in on the ground floor—they’re buying in on about the fourth or fifth floor. This isn’t to say a company’s opening stock price can’t be a great investment—the fourth floor of the Sears’s tower has a lot of upside potential—but be aware that there have likely been several rounds of private investment that came before you.
My first word of warning would be when investing, don’t ever let your answer to “why” be “to make quick money.” Media hype can fuel investors’ unrealistic expectations. Don’t believe the hype! Buying an individual stock hoping it’s a winning lottery ticket is NOT a recipe for success. You should buy stock in an individual company only if you understand the company and have confidence in its long-term prospects. And I hate to say it, but having a Twitter account doesn’t make someone an expert in technology nor investing.
Is Twitter a good buy?
Looking at the bigger picture, I think IPOs in general are bad news for retail investors. They’re just too risky. It is tough or near-impossible to predict what the stock will do on its initial day of trading and in the near future, because there is often little historical data with which to analyze the company. Also, most IPOs are of companies going through a transition period of potential growth, heightening the uncertainty.
As for Twitter, while the company has more than doubled revenue annually, it hasn’t yet turned a profit and the pace of user growth is slowing. Just last week, Twitter was sued for $124 million by two financial firms that claim the company engineered a failed private sale of its shares to pump up investor interest for its IPO. This is just one more snafu in an overall risky proposition. Plus, data shows it’s often best to let a new stock trade three to six months before buying.
That 3-6 months guideline might have saved some investors some pain in the case of the Facebook IPO.
It’s easy to compare Twitter’s IPO with Facebook, and Facebook is a great cautionary tale. In May of last year, Facebook went public after much fanfare. Strong demand, especially from retail investors, was part of what contributed to a relatively high offering price of $38 per share, valuing the company at over $100 billion. It was the largest valuation to date for a newly public company. An OVERVALUATION, according to the stock market. The stock price plunged below $18 during the first months of trading. It has rallied since those early days, but it was a roller-coaster of a ride for those early investors.
Another social media stock, LinkedIn, went public with an initial valuation of $4.3 billion. This more conservative valuation brought tremendous growth, and the share price has grown from $65 to a high of $254. That’s an astounding run.
So who knows what will happen with Twitter. Great pains have been taken to avoid a facebook-style debacle, but even with a conservative valuation, my advice is to proceed with extreme caution or better yet, watch what happens from a safe distance like I intend to. No matter how it goes, I can guarantee it won’t be summed up in 140 characters or less!
Mellody is President of Ariel Investments, a Chicago-based money management firm that serves individual investors and retirement plans through its no-load mutual funds and separate accounts. Additionally, she is a regular financial contributor and analyst for CBS News.