Twitter IPO

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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.

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