Yield of Dreams

TWTR: Hot Now, But It May Burn You!

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On the heels of its highly-anticipated initial public offering, Twitter (TWTR) survived its first day of trading on the New York Stock Exchange, gaining 73 percent by the market close Thursday. The company priced its shares at $26, but they’re now worth $44.90. But Andrew Stoltmann, an attorney with The Stoltmann Law Offices in Chicago, calls the return “fool’s gold.”

The average TWTR investor didn’t get this kind of boost; only the lucky few who bought into the IPO shares did, Stoltmann said. The hot stock could lure many unsuspecting investors, he cautions. Take Groupon, for example, which finished up 31 percent in its first day of trading two years ago. But it’s plummeted 60 percent since then.

Here’s more from Stoltmann on the Twitter IPO:

First, there’s a perception with investors that IPOs always open hot with easy gains to be made. In reality, investing in a company with a limited track record like Twitter carries a very high risk. The Facebook and Groupon debacles were less than two years ago but investors have a short memory when it comes to investing in IPOs.

Second, the financials of the company make it an extremely high risk investment. Twitter had only $317 million in gross revenues last year and posted a loss in 2012 as well as a loss for the first half of 2013. Earnings USUALLY drive stock prices and Twitter is losing money hand over fist. In addition, Twitter has highly concentrated advertising based earnings in only three areas: Promoted Tweets, Promoted Accounts and Promoted Trends. Even more troubling, the company has few long term revenue streams to cushion itself against an economic downturn because advertisers do not have to sign long term contracts.

Third, so many investors who don’t get IPO shares (99% of the investors investing in Twitter) will be buying in the secondary market after Twitter starts trading. It is these investors in the past who have often burned. Some investors in the late 1990s put in market orders for shares only to be filled at a price far higher than what they anticipated. Also, for every IPO that soars, dozens collapse. Remember Pets.com and Dr. Koop? Spectacular flameouts that burned thousands of investors. 

Forth, financial advisors LOVE pitching high profile IPOs to clients that everyone has heard of. Investors tend to lower their guard when it comes to companies they have heard about or used. This is a recipe for disaster for many investors.

Do you agree? Are you recommending TWTR?

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Casting a gimlet-eye on asset management issues.

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