A tidal wave of
optimism blasted Twitter shares up nearly double upon its
stock market debut Thursday.
Is @Twitter #Overvalued?
The initial public offering valued the microblogging site at
nearly $25 billion in market capitalization, with shares closing
at 44.90. S&P Capital IQ's pre-IPO analysis valued the
company at $11.3 billion to $13.7 billion. S&P used relative
price-to-sales and price-to-sales-to-growth analysis because
Twitter has never turned a profit and isn't expected to until
"Our valuation assessment reflects the considerable risks we
see related to some confusion about Twitter's offerings and their
appeal, a number of larger and comparably positioned competitors,
indications of decelerating growth in users and engagement,
significant operating and net losses we see through 2014, and our
view of somewhat lacking
," S&P Capital IQ wrote in a client note.
S&P projects the company will enjoy a compound annual
growth rate for revenue of 97% from 2013 to 2015, fueled by
advertising and overseas potential.
The IPO price is "beyond comprehension," given its current
revenue and three straight years of profit losses, says Ronald
Lang, a principal at Atlas Builds Wealth in Philadelphia, with
$20 million in assets under management. He's recommends clients
stay away for now.
"Despite the fact that these stocks are bought on future
expectations, they need to prove themselves over the next six to
12 months that they can truly monetize their service, especially
on a mobile platform," Lang said in an email.
Twitter's fundamentals look akin to the IPOs during the
Internet bubble, according to Rapid Ratings, a financial research
firm in New York City. The firm's assessment of Twitter based on
62 financial metrics showed Twitter had 92% similarity with
dot-com era bubble companies. By contrast,LinkedIn (
) shows similarity of only 46% andFacebook (
Nonetheless, no other company comes close in providing a
platform in which people can interact with celebrities and global
leaders alike, says Ian Greenleigh, a social media strategist
based in Austin,Texas, and author of "The Social Media Side Door:
How to Bypass the Gatekeepers to Gain Greater Access and
"People are tired of seeing updates from people they already
know, which was the original appeal of Facebook," he said in an
email. "They want to engage with people they want to know --
visible elites who are otherwise inaccessible to ordinary
"Elites employ armies of gatekeepers to keep us out, and to
make sure the information the world gets about them reflects the
images they're trying to cultivate," he added. "But Twitter
shatters those barriers and there's nothing else like it."
ETFs To Follow
Getting exposure to Twitter through an ETF will dramatically
reduce the risk of betting on a very speculative company. These
five ETFs will most likely snatch up shares of the social-media
juggernaut when they reconstitute or rebalance next.
Social Media Index ETF (
), +44% year to date, would be the most obvious fit. It holds 28
social media companies from the U.S., China, Japan, Russia,
Taiwan and Germany.
First Trust U.S.
IPO Index Fund (
), +34% this year, holds 100 of the most liquid newly listed
companies and holds them during their first 1,000 trading days.
It rebalances and is reconstituted quarterly.
3.Renaissance IPO ETF (
), -2% this year, buys IPOs after their fifth trading day and
holds them for two years.
4.First Trust Dow Jones Internet Index (FDN), +38% this year,
holds 42 stocks that get at least 50% of their sales online. But
they must have at least three months of trading history and so
the soonest it could include Twitter is March. The ETF rebalances
on the third Friday of March, June, September and December.
5.First Trust ISE Cloud Computing Index (SKYY), +24% this
year, holds 39 companies that provide computer services on remote
servers as well as those that use cloud-computing technology.
These include Facebook,Zynga (ZNGA) andActivision Blizzard
(ATVI). That would qualify Twitter too.
Follow Trang Ho on Twitter