Twitter Inc.’s initial public offering may be a great opportunity for investors, but there’s significant risk of a disappointing payoff in the early days and weeks following the social media giant’s debut, says Colin Cieszynski, a market analyst at CMC Markets Canada.
“Analysis of previous technology and social media IPOs with high public profiles over the last ten years shows that, while shares have tended to get off to a strong start (even Facebook briefly traded above its IPO price on the first day), initial gains are not usually sustainable,” he said in a report on Tuesday.
Twitter boosted its IPO price to US$23 to US$25 a share earlier this week, but is already several times oversubscribed at the higher end of the range and will likely set a final offering price above that.
Mr. Cieszynski said there is often unfilled demand for blockbuster IPOs such as Twitter, which tends to drive initial spikes on the day of the stock’s debut, as individual investors and traders jump into the trade.
But he points out those spikes are often short lived for several reasons, including a drop off in investor interest.
“Once leftover demand from the IPO is filled, it becomes another of thousands of stocks available for trading,” he said.
He also noted there is a quiet period for research following an IPO, whereby analysts at firms that underwrite the IPO are prohibited by regulation to publish research on the company for a specific number of days.
“This tends to take the wind out of a new stock’s sails for a while until the blackout ends and brokers/analysts are able to get out and drum up interest again,” he said.
Mr. Cieszynski also said a hot IPO may create extremely high expectations and raise the risk of disappointments when earnings come out.
“The problem is that IPOs are usually undertaken to raise money for new initiatives that can take a while to be implemented and become profitable, he said. “This can lead to disappointment with the first few earnings reports. With Facebook, it took over a year for its mobile advertising offering to really take off, at which point the shares doubled in value in under three months.”
It also takes time for companies that are new to the markets to build a track record. Trading in the days following an IPO can be particularly volatile and can create opportunities to profit from moves in both directions. Eventually, trading tends to be driven by company performance and broad market conditions, just as they do for more established stocks.
Mr. Cieszynski added that Twitter seems to have learned from Facebook’s missteps and appears to be doing all the right things to sell its IPO while trying to avoid over-hyping the issue.
The micro-blog provider could also benefit from the rally in other Internet and social-media companies in recent months, including impressive gains by Facebook and Google Inc.
“In this environment, it’s possible Twitter could have a strong opening day,” he said. “Regardless of how it performs initially, history suggests that at some point it could have a period of consolidation and may even trade under its IPO price for a time.”
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