What's Wrong With Twitter's IPO?

Stocks were little changed today on the back of a low-volatility trading session. The S&P 500 and the narrower, price-weighted Dow Jones Industrial Average gained 0.36% and 0.15%, respectively.

If you want any evidence that Facebook's botched May 2012 initial public offering was a traumatic event, just look at the following headlines regarding the most anticipated IPO since the "Facebook fiasco", which I culled from today's Yahoo! Finance homepage:

Challenges abound for Twitter heading into the IPO (Associated Press)

Success of Twitter's Business Model Questioned Ahead of IPO (Breakout/Yahoo! Finance)

As Twitter IPO prices, poll says it's not worth hype (CNBC.com)


Good News for Twitter IPO: Small Investors Are Skipping It (The Exchange/Yahoo! Finance)

But who, exactly, was traumatized? Investors or financial journalists? One headline tells a different story from those I just cited -- one of enthusiasm, rather than skepticism:

Twitter boosts IPO range amid strong investor demand (Reuters)


Although they maintained the size of the offering at 70 million shares, Twitter and its underwriters have raised the previous $17 to $20 pricing range for the stock to $20 to $25. If the underwriters exercise the overallotment option for an additional 10 million shares, Twitter will end up raising $2 billion at the top end of that range. The final pricing is expected for Wednesday, and the shares will begin trading on Thursday.

The truth is that this is a fantastic time for Twitter to go public: The stock market has had a great run this year and growth-stock IPOs have been making eye-popping debuts (witness the shares of sandwich chain Potbelly, which more than doubled on their first day of trading). Finally, the most highly visible social networking stocks -- Twitter's peer group -- have way outpaced the market, as the following performance graph of Facebook and LinkedIn illustrates:

FB Chart

FB data by YCharts

With those precedents in mind, should investors ignore the skeptical articles regarding Twitter and plow into the stock? My answer: No.

Where Facebook and LinkedIn are solidly profitable, Twitter isn't. In that regard, it's closer to local-business review site Yelp, which has yet to turn a quarterly profit (although that hasn't stopped the stock from gaining 241% this year.) Twitter is a fascinating platform, and it has already made a massive impact on business and popular culture, but as a business model, it's still finding its feet. Several ad buyers at major advertising firms recently told the Financial Times that the funds they allocate to Twitter come out of their "experimental" budgets.

I think the odds are excellent that Twitter's stock will post muscular gains once the shares begin trading in the secondary market on Tuesday, but whether it will prove an excellent long-term investment looks much more uncertain. Investors who are interested in buying the shares should first ask themselves what they expect to achieve, over what timeframe ... and how much they are prepared to lose in an adverse scenario.

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The article What's Wrong With Twitter's IPO? originally appeared on Fool.com.

Fool contributor Alex Dumortier, CFA, has no position in any stocks mentioned. The Motley Fool recommends and owns shares of Amazon.com, Apple, Facebook, Google, and LinkedIn. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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