Twitter's Underwriters Have Some Explaining to Do

Now that Twitter's been trading for a few weeks, we're starting to hear from the companies that helped take the social media darling public. All five of Twitter's lead underwriters are chiming in with their ratings and price targets.

They are refreshingly all over the map. After all, Goldman Sachs, Deutsche Bank, Morgan Stanley, J.P. Morgan, and Merrill Lynch may have taken Twitter at $26 just three weeks ago, but they're not all as giddy about it now that the stock is perched above $40.

Let's go over where they are now before taking two of the underwriters to task.

Source: The Wall Street Journal.

So now let's dig a little deeper into where Goldman Sachs and Deutsche Bank are resting with their bullish outlooks. Goldman Sachs sees long-term potential here. It envisions estimates being revised higher as Twitter cashes in on improving monetization of its growing traffic. That's fair.

Deutsche Bank is even more optimistic with a $50 price target. "Shares appear expensive," it warns, but it sees revenue growing to the point where Twitter's now fetching less than 15 times the market's top-line estimates two years out.

That's great, but why did you two take Twitter public at just $26 three weeks ago?

It's an honest question. Clearly two of the five lead underwriters can't establish the market on their own, but this is still an IPO that was woefully underpriced relative to what retail investors were willing to shell out. The stock's very first trade happened at $45.10, forcing most sane market watchers to reason that Twitter left a lot money on the table.

At the time, it was easy to argue that the underwriters and their institutional investor clients were conservative in light of what had happened to Facebook last year. The leading social networking website operator went public at $38, and while it went on to open at $42.05, it was trading in the teens a few months later. Facebook went on to claw its way back above its IPO price -- something that likely paved the way for Twitter to complete its own offering 18 months later -- but the scars lingered.

However, even accepting that Twitter was priced conservatively in light of Facebook's initial disappointment doesn't excuse Goldman Sachs and Deutsche Bank from offering price targets that are 77% to 93% ahead of what they were handing off the shares at just a few weeks ago to choice accounts. There may be style points to be awarded for standing by the companies you take public, but loyalty should always take a backseat to rational thinking. If you're going to price an IPO, don't go overboard with a substantially loftier targets for the masses when little has changed fundamentally at Twitter in that time.

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The article Twitter's Underwriters Have Some Explaining to Do originally appeared on Fool.com.

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