Sunday, October 06, 2013

Negative chatter about the Twitter IPO

Not all of the chatter about the long-awaited Twitter IPO has been positive. The most common criticisms I've heard are:
  1. Fear of the same fate as the Facebook IPO.
  2. Company is still unprofitable.
  3. Growth may have slowed.
  4. Haven't done well enough with mobile advertising.
And the list goes on.
Actually, I personally view all of these negative criticisms as a positive. They would be a negative if I was an insider looking to cash out, but I'm not. Instead, I am a public investor who would like to get into the stock at the lowest possible price. The more negatives (well, perceived negatives) the better.
In truth, a lot of the negativity comes from the perma-bears of Wall Street and the tech sector who always look at almost everything with the most negative possible perspective. So, my real concern is that the average punter looking to lay a bet on the Twitter IPO may not pay too much attention at all to the perma-bear criticism which amounts to a bunch of old dogs whose barks are far worse than their bites.
So, we will be faced with three scenarios:
  1. The negativity does materialize and scare people away, leading to a much lower offering price.
  2. The negativity fades away and we face a steep premium for the offering price.
  3. The company and underwriters blow off the criticisms and grossly overprice the offering.
We have two distinct factors for the offering:
  1. The offering price.
  2. Degree of demand on the aftermarket.
Those two factors are independent, in theory, but can interact. A grossly overpriced offering, ala Facebook, can in fact crush aftermarket demand.
On the flip side, a grossly underpriced offering could spike demand, but if everybody believes that the offering in underpriced to match week financial fundamentals, that could spook a lot of investors and the aftermarket could fizzle.
Given the fear of a repetition of the Facebook IPO fiasco, the company is unlikely to grossly overprice the offering.
And even the data we already know about the company strongly suggests that a really weak offering is very unlikely.
In short, the offering is likely to be priced moderately and attractively.
But, none of this tells us anything at all about aftermarket demand. I personally am a buy-and-hold investor, but there are lots of very short-term traders and speculators out there who will be looking only for a spike on opening day.
A medium-term concern is insider sales on expiration of lockups for restricted stock. That's a reality. Sure, there might be a dip on each lockup expiration, but for long-term investors such as me those will be buying opportunities.

-- Jack Krupansky


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