“There is no doubt that Twitter is a huge force on the Internet. After Facebook, it’s the largest U.S. social network site, with 200 million active monthly users. Not surprisingly, the Twitter IPO is already attracting considerable attention from the media, as bankers and company insiders hype the Silicon Valley success story.
“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 Twitter’s (NYSE: TWTR) 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 predecessor, 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, Facebook shares 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. Twitter wasn’t.
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 disastrous debut.
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 Pandora (NYSE: P) and 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 months.
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 advertising business.
To have staying power on Wall Street, Twitter will need to demonstrate that same kind of growth.
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