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Jumping Off a Cliff: Investing in the Twitter IPO

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Twitter IPO

Unless you’ve been living under a rock lately, you know there has been all sorts of buzz about the Twitter IPO the last few weeks. On one hand, why wouldn’t there be? It seems as though everyone is on Twitter so why wouldn’t you not want to get your hands on some shares during their Initial Public Offering of stock? While there could be opportunity in the future, it is my belief that investing in the Twitter IPO would be as effective as taking a running jump off a cliff and hoping not to hit bottom.

Investing By Throwing Darts

Investing in an IPO, many times is simply like throwing darts at a board to decide on your investing decisions. The basic fact is that few know (at least amongst the retail investors) how an IPO will perform even though there might be a ton of excitement around them like is the case with the Twitter IPO. The problem with that is that it can lead to significant losses when it comes to investing.

Speaking personally, Mrs. Frugal Rules wanted me to invest in Groupon the day it went public. She loved (at the time at least) their product and wanted to invest in them. Against my better judgment I put a little bit of money in to Groupon the day it hit the markets and after a very brief pop it sunk like a rock. I got in at $28 per share and it quickly moved against us. Thankfully it came back up for a bit and we got out at $24 per share. It wasn’t a huge loss by any means, but it provided a valuable reminder to do homework before investing.

Another big problem I have with the Twitter IPO is their efforts to take advantage of a law that allows them to limit how much information they have to provide…um…Red Flag anyone?!

The Numbers Aren’t All Bad for Twitter

Certainly, if you’re interested in investing in the Twitter IPO, the numbers for Twitter can’t be all bad, can they? No, they’re not all bad, as according to an article I read on Yahoo Finance recently. Here are some of the numbers on Twitter:

  • There are more than 200 million people actively tweeting worldwide (20% of those on Facebook)
  • They’re having good subscriber growth – 35% in the States and 47% around the world
  • They’re spending upwards of 40% on research – which could be good or bad

One of the glaring problems with the Twitter IPO though is that they’re losing money, in fact they’re on pace to lose $140 million this year alone – which is on the lower end they’ve had in losses year over year. While I have read that they have good inflows of cash from investors, they’re still losing money at a pretty high rate over the long term. This may not be a problem right now, but many big investors won’t stick around if Twitter continues to lose money every year.

Not Everyone Will Be Able to Invest in the Twitter IPO

When I worked in the online brokerage industry I always hated it when a company with a lot of buzz was going to have an Initial Public Offering and the Twitter IPO is right up there. It brought out all the crazies thinking they could jump in to the IPO and make money hand over fist. When I explained the IPO guidelines we had as an institution, many investors would either get upset or deflated when they saw their hopes of getting rich quick were dashed. As a general rule, most brokerages have guidelines for who can invest in an IPO and they vary from institution to institution. Following are some of the requirements a person must meet to invest in an IPO:

  • An account value of at least $50,000. That’s really on the low end as many require balances in the range of $100,000 to $250,000
  • Specific investment objectives
  • Generally can’t sell the shares right away or risk not getting future IPOs

Beyond all that, many investors don’t realize that most brokerages will give out their IPO shares via a lottery system and thus not even guarantee shares or risk getting less than you wanted. That said, the system is, to a certain extent, not really friendly to allowing retail investors to invest in an IPO and the Twitter IPO will be no different.

Don’t Join the Masses When it Comes to Investing

What underlies the craze over the Twitter IPO for me is the tendency of investors to follow the masses when it comes to their own investment portfolios. The sad fact is that many amongst the masses are simply uninformed and only go off of what they hear amongst the financial “noise.” Taken to an extreme, that can be a very dangerous game to play with your retirement investing and can lead to headaches.

Do I think there’s an excitement surrounding the Twitter IPO? Sure I do. Do I like reading about it? Yes. (I am geeky that way) However, you have to think with a clear head when it comes to your investing and following the masses will (generally speaking) will only betray what you likely want to accomplish with your investments.

As of right now, we don’t know the exact date of the Twitter IPO (though it appears to be sooner rather than later and supposedly in the next few weeks) or what the exact Twitter IPO price will be, though we have some educated guesses. My suggestion in regards to the Twitter IPO is to avoid the “noise” and simply enjoy the fodder it is. If history is any guide with stocks like Facebook we’re likely to see a good decline before truly knowing if Twitter is a stock worth investing in. For those who think that there is considerable money to be made in the Twitter IPO, I would argue that much of the money out there has already been made by private investors prior to Twitter going public.

 

What are your thoughts on the Twitter IPO? Will you be trying to invest in Twitter the first day it hits the market, or will you be holding out?

 

Photo courtesy of: John Rawlinson

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I'm the founder of Frugal Rules, a Dad, husband and veteran of the financial services industry. I'm passionate about helping people learn from my mistakes so that they can enjoy the freedom that comes from living frugally. I'm also a freelance writer, and regularly contribute to GoBankingRates, Investopedia, Lending Tree and more. If you're wanting to learn how to monetize your blog, check out my blog coaching services to see how I can help you take your site to the next level.

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44 Comments

  • Seeing as they currently do NOT make a profit, and have VERY limited avenues for presenting adverts to users, it will almost certainly NOT grow until they can start to generate some profits. (Or at least look like they are moving towards profitability).

    No profits, no share price appreciation.

    My take on the numbers: It might be worth dabbling with in about 6-18 months. I’ll look into buying some long Calls once the dust settles.

    • John says:

      I agree. They’re limited right now in terms of money making, which is just another reason why I’d avoid it.

      Buying some long Calls could be a good possibility once things settle some, though time will tell if that’s a justifiable action.

  • I don’t really do much individual investing, really hardly any at all, so there would be no reason for me to invest in Twitter. I don’t blame people who do invest in it, though, as it seems like a lot of these tech stocks tend to go up over time, sometimes faster than the market. I think there is a lot of gambling involved when it comes to individual stock investing.

    • John says:

      Some do DC, but a lot of them do not – especially if they can’t bring in revenue or fall out of favor in the tech space. I would disagree though that all individual stock investing is gambling. If you’re not doing your research then I would say yes. But, if it’s research based and you’re investing in solid stocks then it is not gambling in my opinion.

  • I’m staying far far away for a lot of reasons, mainly because I don’t buy individual stocks.

  • Interesting. I hadn’t looked at their financials at all. Groupon tanked for similar reasons. IPOs are very tricky. Most of them peak high then plunge once the excitement is over. So if you were really bent on owning Twitter stock, it may be better to wait until it hits the low. The same thing happened to Facebook, whose price dropped down to around $18 from the initial $38 then peaked later around $54.

    • John says:

      Yea, they’re taking advantage of a law that allows them not to not disclose everything. I agree, most do plunge unless you’re someone like LNKD, however for every LNKD you have 20 GRPNs. That said, you’re spot on about waiting and FB is a great example of why.

  • Matt Becker says:

    Well you know my thoughts on this. IPOs are just another way for investors to mostly lose a lot of money. There’s very little reason to invest in something as huge as twitter at the IPO stage other than wanting to be in on the excitement.

  • Nope, not interested. Social media changes so rapidly that Twitter might be obsolete by next year, but I can certainly see people climbing on board because it is something they’ve heard of.

  • Nope, probably not. I remember when Facebook came out and a lot of people were trying to get in on it and it dropped like a rock. Although I thought about investing a little bit in at it’s low, I decided not to. I probably should have as it has almost doubled. Oh well. That’s why I tend not to pay too much attention to individual stocks…it is somewhat of a crapshoot sometimes.

    • John says:

      I remember that as well Andrew. Everyone and their brother wanted in on it and it was just bungled from the get go. It would’ve been nice to get into it a number of months back when it was lower, but I am not convinced it’ll last long term.

  • I mocked the Facebook IPO–and look at the price now! I’ve always liked Twitter (and dislike FB), so I’m interested in investing in Twitter. I wouldn’t risk much though–sort of taking a flyer.

    • John says:

      Very true Kurt, though I am hesitant to say that FB has true long term sustainability. I love Twitter myself and use it a lot, though they have big issues in terms of revenue.

  • It is just so hard to predict. Is the Twitter IPO going to fall flat on its face like Netscape or be something hugely profitable like Google? I just don’t have “Goof around” money so I’ll be steering clear as well.

  • Great advice and facts. I didn’t know some of those details about investing in an IPO. While I’m probably not too interested in investing in Twitter, I do regret not dumping some money in Netflix a couple years back.

    • John says:

      Thanks Erin! Yep, investing in an IPO is highly risky and there are quite a number of rules & regs involved with them.

      I am still kicking myself over Netflix!! I had the trade ticket filled out when they were at their low under $100 and I chickened out. 🙁

  • I will not be investing in the twitter IPO but will enjoy hearing how it plays out. I invested in facebook when the share price hit $20 and sold just a few weeks ago. I was happy with that.

  • Average Joe says:

    The one stat to rule them all for me, John: they aren’t profitable. If I have only one dollar to invest, where am I going to put it? In a company with lots of traffic and no profit or in a cash cow? I, like you, will pass….

  • I have no experience with investing, but I would stay away from Twitter. Your Groupon story seems like one that could happen again with Twitter. When Zynga went public, it was also a huge craze over it and the price of the shares went down instantly and the company itself is kind of struggling right now. You would pay way too much, in my opinion, for hype. Or at least that’s how I feel 🙂

  • I won’t be on the investing train for Twitter. They don’t make money, and they have no real way to monetize the site. Yes, they do have twitter ads and promoted tweets, but people don’t care about that. The ROI on such advertisements is super low and advertisers don’t want that. I would be happy to eat my words later, but I won’t sink a dime into them.

  • Usually big hyped IPOs are a disaster in the days following going public. Big case in point: Facebook. The stock sank within a matter of days after the euphoria had worn off and the stock had to trade on its business plan, not its social media reputation. It has come back but is likely with a high turnover of shareholders. Unless you can own some shares from the IPO, I would not touch it when it goes public.

  • Jacob says:

    Now, what about investing like a month in after the HUGE initial drop that keep happening? THAT’S WHERE THE MONEY IS!

    I’m on the index investing kick, no need to plan with these silly IPO’s. 🙂

    • John says:

      Potentially Jacob…as long as the numbers can justify it. Otherwise, I’d still stay away that close to the IPO as they still won’t be profitable. That said, you can’t go wrong with some solid index funds.

  • Steve says:

    Only a quick walk through the graveyard of late-90s/early 2000s internet bubble demonstrates all too clearly not to follow the masses into tech companies that aren’t producing tangible profits!

    • John says:

      I could not agree more Steve. The thing that many don’t realize is that for every LNKD there are 20+ (if not more) of Netscape or Zynga. Thanks for stopping by! 🙂

  • Martin says:

    I only couldn’t figure out how Twitter makes money. From a poor and quite ineffective advertising? I am out.

  • Liquid says:

    I won’t try to get in on the first day it goes public, but I might buy some shares after the price levels off. Of course it will be purely speculative as the P/E is nonexistent since TWTR isn’t profitable yet. I think the stock will start trading at around 18$, but then jump up to $30 right away because of all the hype. Then over the course of a week fluctuate like mad lol. Eventually it will settle at around the mid 20s. Just guesses of course, who really knows at this point 😉 Your Groupon story teaches some good lessons. If I do buy end up buying some Twitter shares I’ll definitely put in a stop loss 🙂

    • John says:

      I think going up that much would be pretty optimistic. I think they’ll see a slight increase like FB did and then start going down – all guesses of course. 🙂 And, yes, the stop loss would be vital.

  • I would stay away from these hot fad stocks. It’s no Google.

  • I went through this with the Facebook IPO too. I understand their interest because the allure of getting in day 1 on something that is so sure to blow-up is huge but …. yeah. People don’t do their due diligence either. Too many investors just follow the crowd or what’s being talk about without considering whether it’s a good fit for their investment goals.

    • John says:

      I could not agree more Shannon. The FB IPO is a perfect example of why not to go gung ho over many of the IPOs we see out there. Following the crowd, in most cases, is simply a recipe for disaster when you’re talking about your investing.

  • Thanks for the advice. I think one of the big problems with this kind of thing is that it is easy to confuse a popular, good product with a good value investment. Just because we all use Twitter dosn’t mean that the shares will make us money if we buy them

  • Good points. I think it’s just too risky to get into IPOs in general. They are usually unproven by the market and subject to too many variables – just an easy way to lose money really. And just because a company is popular, doesn’t make it a good buy. I’ll be sticking with indexes and businesses with proven track records.

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