IPO? uh oh!

TWTR twitter stock
Sponsored By:

Twitter IPO Is a Waste of Time

twitter logoTwitter IPO news is everywhere, and investors are now rabid to get all the details on Twitter stock before it hits Wall Street.

What’s the Twitter stock ticker going to be — TWIT? Maybe TWTR or even TWET? How big will the Twitter IPO be, where will Twitter’s valuation ultimately wind up after the initial public offering and how expensive will the stock be?

And, of course, how will all these answers match up against peers like Facebook (FB) and LinkedIn (LNKD) or related Web 2.0 plays like Angie’s List (ANGI), Yelp (YELP) or other fashionable tech stocks?

If you’re a retail investor asking these questions about the Twitter IPO … just stop.

The bottom line is that initial public offerings are not for you. This includes the Twitter IPO or the Facebook IPO previously or whatever else will come down the pike in the years ahead.

I know it’s fun and interesting to get lost in the minutiae of an exiting tech stock like Twitter. But here are two simple reasons you should tune out the Twitter IPO coverage and stick with your boring old strategy of buy and hold:

Insiders Get Rich on a Twitter IPO — Not You

Mere mortals that we are, retail investors suffer a host of disadvantages in the stock market — including higher fees, competition from high-frequency trading robots and a general lack of knowledge and resources to invest wisely. IPOs are just one more example of how the little guy gets squeezed out, and you will fight against this in the Twitter IPO at your peril.

Underwriters reserve IPO shares of a hot offering like Twitter for select clients, so you will have to buy on the open market — meaning you are waaaaay back in the line and will thus be paying a serious premium for Twitter stock.

Furthermore, under the JOBS Act that is meant to facilitate access to capital markets, there is information these insiders get that you don’t. Companies like Twitter floating an IPO can meet with “qualified institutional buyers” to get a sense of their interest … meaning the fat cats on Wall Street get to sit down with execs and chew the numbers well before you do, and can ask questions to which you will never hear answers.

Be realistic about a Twitter IPO. The insiders have all the firepower here.

More Speculation, Fewer Facts on Twitter Operations

High-profile IPOs — particularly in social media stocks like Facebook and LinkedIn — create a lot of hype. Everyone wants to believe in the next big thing, and given the forward-looking nature of a Twitter IPO you can expect grandiose projections for the business.

That’s natural, seeing as investors want to know how the capital from an initial public offering of Twitter stock will be used and what the long-term plan is for the business. But remember that this is all speculation and hope — not hard facts.

Also, there is no access to Twitter SEC filings for the last several years because it was a private company and as such doesn’t have to disclose the same amount of info that tech stocks like Apple (AAPL) or Google (GOOG) have to.

So you are flying blind both in the rear-view and in the forward-looking estimates of where the stock will be after you buy it. Not a good position for any investor to be in, let alone a small-time trader without access to tools or resources that will help fill in the blanks on Twitter stock.

Avoid the Twitter IPO

This is not to say that Twitter might not be a decent buy for certain portfolios in the future, or that the company will not succeed. All that I am saying is that the hype surrounding Twitter stock as it first hits the market will stack the deck in favor of well-heeled investors who are cashing in on the event as a moment in time.

If you like Twitter, wait for the IPO hype to settle, then take a serious look at the company after the first earnings report and after the lock-up in shares passes for the first batch of insiders.

Consider the crash and burn of Facebook after its IPO as a cautionary tale. When it comes to the Twitter stock offering, patience is the way to go.

Related Reading on Twitter IPO

Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. Write him at editor@investorplace.com or follow him on Twitter via @JeffReevesIP. As of this writing, he did not own a position in any of the stocks named here.

Get The Slant delivered to your inbox every day!

Comments