Twitter IPO – Are You a 1%er?

You may have heard (sarcasm here) that Twitter, Inc. (NYSE – TWTR) is going public today, with a pre-market price that will start around $25 as the company tries to raise approximately $2 billion with the highly publicized IPO.

Now, the headline today is slightly overstated. Clearly, there are more qualified Accredited Investors that are eligible to buy primary offerings from IPO’s than the very, very rich, but too many retail investors believe they are getting in on the IPO when they are just getting into the first day of secondary trading. There is a huge difference here, and too many people get burned not knowing the difference. Unfortunately, the old caveat it takes a lot of money to make a lot of money applies to the investing public classes as well.

Twitter is a highly innovative, immensely popular company that is changing media, communication, and the news with over 230 million subscribers to date. The company is yet to turn a profit. Let me repeat, the company is yet to turn a profit.

Clearly, in the long term TWTR may be a great stock as the Company finds additional ways to monetize its products. However, we believe you should sit this one out for at least six months or so. In the normal universe, stock prices rise on future earnings potential. The hype around TWTR has created an overinflated demand, and will no doubt drive the price high in the first few trading sessions or so. This is Economics 101.

Here is a brief history lesson on firms in similar spaces and the ‘hot IPO’ that burned several retail investors.

Pandora (NYSE – P) went public in June of 2011 with price around $15 and shot up to $20 in just one week as retail investors piled in on this hot IPO. The stock then lost half its value over a massive 3-month sell-off and bottomed out at just over $7 after a slow and steady 14-month decline in November 2012. Pandora has a made a nice comeback, but too many retail investors bought high and sold low here.

Facebook (NASDAQ – FB) is another revolutionary company that went public without a lot of history of earning much money at all. At the onset of the IPO in mid-May 2012, the stock shot up over $38 on day one of trading due to the huge demand. The stock dropped to $25 within two weeks and to $17.75 by Labor Day the same year. This was over a 50% drop in three months. Clearly, if you had the patience and hung on after buying on day one it has finally paid off as FB is trading over $49. But this was a great example of hype creating hyper-demand and burning a multitude of retail investors.

Could we be wrong? The answer is sure, but our mission is to try and find value for John and Jane Q retail investor. This resides in abundance in the small cap space where investors and traders can add stocks to the satellite portions of their core/satellite portfolios or make a quick buck on cheaply priced stocks. At this point, Twitter is a great app but early on it will be all hype so for now, we recommend you wait it out until it settles, post-hype.

Have a great day!

Disclosure: Goldman Small Cap Research analysts are neither long nor short these shares but may elect to purchase the stock within the next 48 hours.

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