Is the Twitter IPO Euphoria Sustainable?

On Thursday, Twitter opened up higher than its $26 IPO price on huge speculative demand. The shares opened at $45.10 on the New York Stock Exchange, under the ticker TWTR. Speculators chased the market to a high of $50.09 before settling at $44.90, up 73%. The strong finish puts the stock’s capitalization at more than $31 billion. This is lower than Facebook’s $120 billion value, but above the valuation of LinkedIn’s $26 billion.

Now that the euphoria of the IPO is over, investors will have to decide the value of the company’s long-term opportunities. The service is already a popular global media tool, but investors will have to decide if its growth can be sustainable given the stiff competition it faces from Facebook and LinkedIn. Because of these doubts, sellers may take this market back to its original IPO price of $26 before reassessing its future prospects.

The key to success of this stock will be how fast it can turn its business model into a viable money-making venture. Patient investors and those in for the long haul are likely to back away from this stock until it comes down to a value area. This often happens with popular IPO stocks which have been pumped up by excessive speculative demand.

Although the service has huge brand recognition, it has yet to turn a profit. It lost $67 million in 2010, $164 million in 2011 and $79 million in 2012. It has also continued to bleed cash in 2013. Its ad revenue may be increasing, but it is still well behind Facebook in this category. This stock had to retreat after its IPO and didn’t reach a bottom or exceed its IPO price until it began making money from its mobile advertising.

The question that long-term investors have to ask themselves is does this company have long-term growth potential. Some reports suggest Twitter is adding new users at a slower pace. In addition, although revenue is rising, it is doing so at a slower rate. If this trend continues then the stock may have to wallow at prices below current levels before it finally rights the ship. This is no guarantee either since there have been social media darlings in the past like MySpace which never lived up to its initial hype.

If the stock is overvalued, smart money will take care of that situation over the long-run. Speculators may try to hold this market above the $26 IPO price over the short-run, but eventually the market will begin to trade off the key fundamentals and this may set up the stock for a correction back to a more suitable value area. 

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James Hyerczyk

James A. Hyerczyk has worked as a fundamental and technical financial market analyst since 1982. His technical work features the pattern, price and time analysis techniques of W.D. Gann.

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