Twitter IPO: To invest or not to invest?

11/14/2013 11:23:58 AM

Bashar Qasem, CSAA
President and CEO

It’s official. The bird began trading on Wall Street last week with its IPO surging over 70% bringing the company’s value to more than $25 billion. According to Wall Street’s valuation, each Twitter user is worth around $110. At its peak, shares were trading at 45.8 times revenue over the past 12 months (compared to Facebook’s IPO which debuted at 26 times revenue). Even at its IPO price of $26 a share, Twitter was branded the most expensive IPO in U.S. history relative to revenue.

Now that retail investors can purchase the stock, should they? I believe there’s great potential for investors to purchase the hype and get burned. A stock makes a good investment if its fundamental characteristics look promising. One of the most basic criteria to consider is a stock’s price to earnings ratio. Twitter’s stock appears overpriced by many conventional measures. Its price can only be justified if the company is a rare runaway success.

It’s also important to consider a company’s business model. Twitter doesn’t currently turn a profit and hasn’t since it started in 2006. How will it make money in the future? Simply put, Twitter needs to turn targeted ads, especially mobile, into a big business. It has some major competition to deal with, including some companies already turning a profit like Facebook and Google.  

Does this sound familiar? Is should. Consider what happened to Facebook, Groupon and Zynga’s stocks just six months after their IPOs debuted on Wall Street. They were all down 40%, 46%, and 42%, respectively. So, if history is any indicator (and, of course, past performance can’t guarantee future results), Twitter’s stock will likely come down to reflect its true worth. At these prices, the stock is just too much hype and not enough reality.

Opinions expressed are those of the author or fund manager, are subject to change, are not guaranteed and should not be considered recommendations to buy or sell any security and should not be considered investment advice.

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