"There is no doubt that Twitter is a huge force on the
, it's the largest U.S. social network site, with 200 million
active monthly users. Not surprisingly, the
is already attracting considerable attention from the media,
as bankers and company insiders hype the Silicon Valley
"But that isn't enough reason to justify buying this
upcoming IPO. . ."
My colleague Ian Wyatt
wrote those words
in late October, two weeks before
highly anticipated market debut. He wasn't alone. Just about
everyone was cautioning against buying the Twitter IPO. Many
worried that it would suffer the same fate as its social media
Facebook (Nasdaq: FB).
Facebook's May 18, 2012 IPO was
an outright disaster
. Technical glitches on the Nasdaq exchange delayed public
trading of the stock and it never recovered. After going public
at $38 a share, the stock tumbled all the way to $17 in less than
four months. It took more than a year for FB shares to return to
their IPO price.
Twitter had no such problems. The stock set its IPO price at
$26, closed its first day of trading at around $45, and is all
the way up to $57 now. If you bought Twitter shares the first
minute they went public (at $45 a share, way up from the original
IPO price of $26), you would have earned a return of 27% in less
than three months. By contrast,
declined 45% in their first three months of trading.
So it's safe to say Twitter has successfully avoided becoming
the next Facebook. The question is how.
Facebook, after all, was profitable at the time of its IPO.
Facebook was generating 60% more revenue per user than Twitter
at the time it went public.
On the surface, Twitter had the makings of another social
media IPO disaster. Ian had very good reasons to warn readers
against investing in Twitter's IPO
. But Twitter's executives made a few smart moves to ensure that
the company avoided Facebook's fate.
For starters, Twitter listed on the New York Stock Exchange
instead of the Nasdaq, which was responsible for Facebook's
Next, Twitter didn't allow all the hype leading up to its
debut to cause its IPO to be too overpriced. Twitter's IPO priced
at $26, but by the time it actually began trading on the NYSE it
was already up to $45. Clearly, Twitter's IPO price didn't scare
early investors off.
But the main difference between Twitter's IPO versus
Facebook's was market condition. Facebook went public in a year
in which stocks were up 13%. Twitter went public at the tail end
of a year in which stocks were up nearly 30%, riding the momentum
of the best year on Wall Street since 1997.
Furthermore, Facebook went public at the beginning of the
traditional "Sell in May" period. Twitter went public just before
the holidays - the best time to invest on Wall Street.
True, Twitter had the benefit of going after Facebook and
other failed social media IPOs such as
Zynga (Nasdaq: ZNGA).
It was able to learn from those companies' mistakes.
But timing is everything on Wall Street. And that may have
been the biggest factor driving Twitter in its first couple
Now comes the hard part. Few companies see their share prices
rise in perpetuity without turning a profit. Until Twitter
becomes profitable, its stock will be on borrowed time.
Despite its early struggles, Facebook today looks like the
better investment of the two social media giants. Facebook turned
its fortunes around by growing profits and expanding its mobile
To have staying power on Wall Street, Twitter will need to
demonstrate that same kind of growth.
The One Stock to Own in 2014 - The Year Mobile Takes
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Click here for the full story