Twitter Stock Debut: Flying in the Face(book) of IPO History?
NEW YORK ( MainStreet) The performance of initial public offerings has typically required a great deal of investor patience. Facebook investors had to wait more than a year to see any upside, which finally occurred in just the last three months. Will Twitter's IPO soar or slump?
Gerard Hoberg, associate professor of finance in the University of Maryland's Robert H. Smith School of Business, thinks the Facebook comparison is right on target.
"Both firms are relatively young and vibrant in a social media area, where stock prices have surged this year for companies such as LinkedIn and Yelp," Hoberg said in a recent analysis.
Facebook took it on the chin in its market debut, coming out of the gate at $38, only to wallow in the teens for the next three months, before finally finding its footing.
"Investors will surely remember the early failures of the Facebook IPO and will be a bit more cautious this time around," Hoberg said. "Yet Facebook's recent strong performance will offset these concerns."
Investors will naturally compare the two social marketing machines in an attempt to project potential profits.
"In a sense, they will use Facebook, with its known stock price, to estimate Twitter's value," Hoberg said. "Perhaps experts will even consider the extent to which these firms will ultimately become rivals."
Hoberg served as a visiting economist last year with the Securities and Exchange Commission and focuses his academic research on corporate finance, empirical asset pricing and initial public offerings.
"In past decades, evidence shows IPOs are poor investments on average. However, this no longer appears to be the case," Hoberg says. "Although they are volatile investments, IPOs tend to perform about as well as seasoned industry peers on average. I don't expect today's IPOs to be any different. In addition to having high-profile underwriters, IPOs perform better when insiders are selling fewer of their own shares in the IPO (i.e., when most or all IPO proceeds are used to fund new investments and not insider sell-outs)."
Hoberg expects the Twitter IPO to serve the micro-blogging site well.
"I expect there to be those who invest based on "vision". Some of these investors will perceive a very high valuation for Twitter based on their beliefs about high likelihood ways for Twitter to transition to a high profitability mode in the future," Hoberg tells MainStreet. "Others will see a more pessimistic vision that may entail increased competition from Facebook or Google, or others. Still others will try to trade based on technical traits like revenue multiples. In the end, there should be volatility, but the underwriters should be quite skilled by now to make this a success, and to price the issue in a way that favors a positive response by the market, and thus all of the institutional participants feeling satisfied that they participated." Hoberg expects the IPO to experience decent positive first day returns from the IPO price.