As with most, if not all, IPOs, the initial wave of speculators and investors buying into the hype the issuers pent up has inflated the stock price of Twitter, now sitting at 41.65. The stock was issued at $26 per share on Thursday, but instantly shot up to $46. While some believe we are in a new “tech bubble” like the dot-com bubble, I think this drastic overvaluation of a company with no profit is just another symptom of over-zealous IPO investors.

Never Buy an IPO

This was the sound advice given to me by an instructor at Bloomberg, L.P. The real, underlying purpose of IPOs is for initial investors (venture capital or other investors when the company was private) to take their money and run. Of course, during the dog-and-pony shows before the IPO, CEOs and bankers tend to hype up the security in efforts to cash out at the highest point during the IPO. Everyone wants a part of Facebook (Twitter in this case), right?! This is why you often see the stock price for a new issue shoot up the day of the IPO, like Twitter rising by $20 in the first day of trading.  But then the real drama unfolds. After the initial investors have cashed out and the initial hype is over, stock prices plummet. Below, you can see how this initial hype unfolded for Facebook and LinkedIn during the first 30 days after their respective IPOs:

Twitter IPO Compared to LinkedIn and Facebook IPOs

Twitter IPO Compared to LinkedIn and Facebook IPOs

It took LinkedIn more than half a year to finally stay in the green above its opening price and Facebook nearly a year.

Facebook and LinkedIn Returns Post-IPO

Facebook and LinkedIn Returns Post-IPO

 

Twitter Isn’t Profitable

Leaving the fact that IPOs are never a good idea aside, let’s look at Twitter from a financial perspective. In its recent filing with the SEC, Twitter reported total revenue of about $317 million while its expenses were nearly $400 million, resulting in a loss of about $80 million. Dough Roller argues that if Twitter’s YTD revenue (not including any expenses) were extrapolated to include all of 2013, Twitter’s P/E ratio would be a whopping 32, 2.5x Apple’s. Factor in expenses and this number would be much higher.

Short Twitter Now

With the over-hyped IPO now over and poor financial standing, I’d recommend selling Twitter now. Though, as they say, “past performance is not indicative of future return,” so make your own assessment of Twitter before taking a position.

 Disclaimer

The author of this article has no positions in the stock described above.

Bobby Kania and Jonathan Brooks are not investment professionals and are not liable for any direct or indirect trading losses caused by any information on this site. Any investments you make are at your own risk. Please see our disclaimer page for further information.