Here’s Why You Shouldn’t Invest in Twitter

Here’s Why You Shouldn’t Invest in Twitter

FARHAD MANJOO

Nov. 6, 2013 7:30 p.m. ET

Twitter Inc.’s rise has been a remarkable story. Both because it was beset by chaos (see Nick Bilton’s new book for the operatic details) and because, despite the chaos, Twitter has somehow managed to become a legitimate, even straitlaced business, its IPO is a good time to congratulate the firm on its unlikely success. But it isn’t a good time to invest in Twitter when it starts trading Thursday. Here are three reasons to sit this one out:Don’t invest in individual stocks. Especially don’t invest in tech IPOs. This isn’t tech advice, just widely accepted financial wisdom for normal, non-professional, non-gambling investors: Buy index funds and forget about picking. And, really, it’s the first and the last reason for you to stay away from TWTR. If you’re no expert, don’t pit yourself against the experts.

Right now, there are hundreds of stock analysts, market researchers, advertising gurus and other people who are being paid vast sums to determine whether and how much to invest in Twitter. Going up against them is a loser’s game, and you shouldn’t play.

This is true of all stocks and isn’t specific to Twitter. But there’s a special danger in IPOs, especially big-name tech IPOs, which are governed more by mass hysteria than any kind of rational assessment of long-term potential.

If you think Twitter is going to be a successful company, that will be true three, six, and nine months from now, too. There’s no reason to join to the IPO bandwagon other than to indulge a day-trader’s fetish for a quick pop.

…But say you buck these warnings and are fine with gambling on individual stocks? Here are more reasons not to invest in Twitter specifically:

You don’t understand Twitter. Few people do, really. It’s telling that Twitter’s IPO roadshow video begins with three of its co-founders, Evan Williams, Jack Dorsey and Biz Stone, expressing slack-jawed awe at the company’s rise.

Twitter is such a simple product that nobody quite expected it to take off as it did, and the ways in which people began using it were so innovative that they constantly surprised even its creators. Indeed, many of Twitter’s signature functions, including @-replies and hashtags, were invented by users, not the company.

Twitter’s flexibility is what makes it so much fun. It’s also what makes it such an important social force: I’d argue that Twitter is changing how the world communicates—especially how we get our news—more deeply than any other social service. For instance, there’s pretty solid evidence that Twitter has radically transformed how the media cover presidential elections.

But from a business perspective, Twitter’s flexibility seems as much a blessing as a curse. Twitter is still a niche service, one experiencing solid but unspectacular user growth.

The optimistic take on its user base is that Twitter just hasn’t figured out a way to explain itself. As it sharpens its message to new users—see the “Discover Twitter” intro page it just launched— perhaps more people will realize that Twitter is right for them.

The pessimistic take is that, no matter how well it explains itself, Twitter just isn’t for everyone. Its unstructured, chaotic nature is simply not of mainstream appeal.

Here’s the trouble for any would-be investor: Nobody knows which of these takes is right, not even people who tweet all day, not even the folks who make Twitter. Whatever you think Twitter is, and whatever you think Twitter will be—it’s all just a guess.

Twitter’s place in the advertising business isn’t clear. In Web years Twitter isn’t a very young invention, but as a company, it is a late bloomer. Only relatively recently has it morphed into a well-functioning business based on a key advertising product, the Promoted Tweet.

So far, its advertising business has worked well. It has seen solid growth—the company’s revenues doubled over the last year—and because tweets are so short, Twitter is well positioned to take advantage of the rise of mobile devices. More than two-thirds of its advertising revenue now comes from mobile ads.

Yet its business is plagued by questions for which we have no answers just yet: Do Twitter’s ads “work”—do they reach enough people, do they alter purchase decisions, and are they becoming a standard part of advertisers’ media buys? Can Twitter’s business skyrocket if its user base doesn’t? Will it constantly find itself losing out on ad deals to its behemoth rivals?

I’ve heard from many in the advertising business who are quite optimistic that Twitter can become a key part of the way marketers’ target the Web. One of the more compelling arguments for Twitter’s ad business is that, because it doesn’t have the benefit of a billion users, it will be forced to come up with more creative ways of monetizing its users. In other words, Twitter’s size makes it hungrier than Facebook FB -1.97% —and that hunger will inspire risky innovation. See Twitter’s decision to buy the mobile-ad company MoPub,which has been hailed as a way to create an advertising network that can track and target users as they flit from desktop to mobile devices, a feat that no other ad company does well at this point.

Honestly, I suspect there’s some truth to this; again and again in the tech industry, we’ve seen that size doesn’t necessarily lead to success, and sometimes it hinders it.

But that doesn’t change the fact that Twitter is a risk, a big one. If you bet on Twitter, you ought only go into it with the understanding that you don’t know what will become of the company. You’re walking into this deal nearly blind, because you have to, because Twitter is so young, so small, and so different that it’s hard to know what to make of it. Sometimes such investments turn out to be huge. Other times you reach for the Maalox. Good luck.

 

Twitter’s IPO Priced at $26 a Share

Pricing, $1 Higher Than Range Set Earlier This Week, Values the Social-Media Company at $14.4 Billion

MATT JARZEMSKY, TELIS DEMOS and JULIE STEINBERG

Updated Nov. 6, 2013 8:22 p.m. ET

Twitter priced its initial public offering at $26 on Wednesday, after raising its original range to $23 to $25 from $17 to $20 earlier this week. The company is selling 70 million shares. MarketWatch’s Dan Gallagher reports. (Photo: AP)

Twitter Inc. priced its shares at $26 apiece for an initial public offering that will be the biggest U.S. technology IPO since Facebook Inc. FB -1.97% ‘s debut last year.

The short-messaging service priced shares a dollar higher the range it set earlier this week, giving the company a market capitalization of $14.4 billion.

The deal is set to raise as much as $2.1 billion for the San Francisco-based company, which remains unprofitable but which has transformed public discussion on subjects from celebrities to public policy to pets.

The price of $26 is available primarily to large investors such as mutual funds and hedge funds, as well as some of the individual clients of the banks underwriting the deal, led by Goldman Sachs Group Inc.GS +0.97% Other investors should be able to buy the stock Thursday when shares are expected to trade on the New York Stock Exchange NYX +0.78% under the symbol TWTR.

The average one-day “pop,” or price rise, for U.S. listed IPOs this year is 17%, the highest since 2000. Six companies so far this year have doubled in price on their first day, Dealogic said.

The banks aimed to place the bulk of the shares with a relatively small number of long-term investors, investors briefed on the deal said. About three quarters of the shares were set to be placed with around 30 investors, the people said.

Retail investors, including customers of some online brokerages and brokerages affiliated with the investment banks on the deal, were slated to receive less than 20% of the offering, people familiar with the plan said. That total could change in the final pricing. Facebook placed a larger amount of its shares, 26%, through retail channels. TD Ameritrade HoldingCorp. AMTD +0.91% and Fidelity Investments both expected to receive Twitter shares from underwriters for some customers.

One who wants in is Deborah Watkins, a 56-year-old administrative assistant in Chicago. She said in an interview Tuesday she “messed up” in not buying Facebook last year and hopes to buy at least 50 Twitter shares on Thursday through her Ameritrade account.

She’s interested in Twitter, she said, because of her economics-major nephew and because she doesn’t want to miss out on a potentially successful stock, even as the 140-character message service, often used on smartphones, is largely foreign to her.

“I don’t even use it,” she said. “You know what kind of phone I’ve got? A prepaid!”

Twitter has the wind in its sails for its debut. October was the busiest month for U.S.-listed IPOs since 2007, and 2013 is on track to be the best year in terms of deals and dollars raised since 2007.

The Dow Jones Industrial Average closed at a record high Wednesday, on the heels of a 20% rise year-to-date. Social-media stocks have trounced that. Facebook is up 85% this year. LinkedIn Corp. LNKD -1.67% has climbed 92% and Yelp Inc. YELP -6.35% has gained 253%.

Earlier in the day, bankers were telling investors they were aiming for $27, people familiar with those talks said. After discussions with the company after the market close, the final price was set at $26, people familiar with the discussions said.

The offering price confirmed the wealth of Twitter’s leaders, including Chairman Jack Dorsey and Chief Executive Dick Costolo, whose stakes were worth around $610 million and $200 million, respectively, at the $26 price.

Some investors are enticed by seven-year-old Twitter’s 232 million monthly active users, its growing revenue and its key place in the conversation about many public events. Revenue more than doubled to $422 million for the nine months ended Sept. 30. Twitter is seen as ahead of rivals on mobile devices, source of more than 70% of its revenue in the third quarter.

But Twitter’s losses are growing almost as fast as revenue are growing, and user growth is slowing. The number of monthly active users grew 6% in the third quarter, compared with the second quarter, down from 7% in the second quarter and 10% in the first quarter. Twitter posted a loss of $134 million in the first nine months of this year, nearly double the loss of a year earlier.

The company also faces challenges proving its value to advertisers and expanding its reach abroad, home to three-fourths of its users, but only one-fourth of its revenue.

Risks aren’t deterring some investors.

One financial adviser at Bank of AmericaMerrill Lynch, one of the banks on the deal, reported getting “a lot of inquiry and demand” about Twitter from clients. Thursday afternoon the adviser was still waiting to find out if any shares would be available for them.

Others say individuals haven’t shown much hunger for Twitter. “Everyone called for Facebook” said one financial adviser at Morgan Stanley, MS +0.48% a lead bank on the deal. “For Twitter I’ve received one call.”

The adviser said about 40 clients asked for Facebook shares. “I had more calls about the Container Store IPO. [Clients] want an ongoing business. Twitter could be a fad,” he said, referring to the share sale last week by Container Store Group Inc. TCS +1.56%

A big test will be the appetite among large investors. Nabil Elsheshai, senior equity research analyst at Thrivent Financial for Lutherans, which manages $82 billion in Minneapolis, likes the stock. He put in an order for shares in the deal and plans to try to buy stock Thursday up to a certain price, which he declined to disclose.

“They’re at a better phase and did a better job rolling out the IPO than Facebook,” he said.

The Twitter deal should generate hefty fees for Wall Street, at least $56 million. In addition to Goldman Sachs and Morgan Stanley, J.P. Morgan Chase & Co. is leading the deal, with Bank of America Merrill Lynch and Deutsche Bank AG DBK.XE +0.61% also participating. Boutiques Allen & Co. and Code Advisors also have roles.