Tags: Twitter | boom | market | mania

Experts: Twitter's Boom Echoes the Din of Market Mania

Image: Experts: Twitter's Boom Echoes the Din of Market Mania

Thursday, 07 Nov 2013 06:09 PM

By Dan Weil

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While investors who received Twitter shares at the initial public offering price and then flipped them Thursday made out handsomely, the stock's 73 percent first-day gain was vastly overdone, experts assert.

After an IPO price of $26 and an opening of $45.10, Twitter closed at $44.90. "It's obviously not worth that," said Michael Carr, a Moneynews insider. 

"A simple study I saw showed that IPOs that price at more than 12 times their revenue consistently lose over the next year," Carr added. "Facebook was priced at 30 times and did nothing for quite a while."

Editor’s Note: 5 Reasons Stocks Will Collapse . . .

At the opening Thursday, Twitter traded at 22 times estimated 2014 sales, valuing the company at $24.6 billion, according to Bloomberg. On Wednesday, fellow social media companies Facebook traded at 11.6 times sales and LinkedIn at 12.2 times sales.

"This valuation is based more on animal spirits than on the business," says Robert Wiedemer, co-author of "Aftershock: Protect Yourself and Profit in the Next Global Financial Meltdown." The Twitter mania reflects the fact that the whole stock market is overvalued, he maintains. "The idea that a company that hasn't made any money is worth $25 billion is a stretch."

Twitter’s loss widened to $64.6 million in the quarter ended Sept. 30 from $21.6 million a year earlier. To be sure, revenue surged to $534.5 million in the 12 months through September.

The Twitter tumult is all about emotion, says Mick Heyman, an independent financial adviser in San Diego. "Part of everything with the market is emotion. But underlying that is real earnings with a lot of stocks," he said.

"You're just buying these IPOs on a whim. I don't think there's any way to really value it."

The question marks don't mean Twitter won't rise further. "It could be $80 a year from now," Wiedemer says. "But long-term, it's part of a social media bubble."

Views about Twitter's long-term prospects vary. "My guess is that Twitter will become profitable," Wiedemer says. "But the risk is that the fad element changes. That can be very important. Now it's cool to Tweet. That can change."

Wiedemer says Twitter's business model is superior to Groupon's but comes up lacking compared to Google and eBay. "Google reinvented ads, and eBay created a global flea market," he said. "Twitter has the same old display ads."

Carr has a bleak long-term outlook for Twitter. "I think it's going the way of newspapers," he said. "Newspapers always relied on ads, and that has dried up in recent years."

Twitter is trying to build a model relying on ad revenue too. "But there is no market for 140 character ads when you can do it with as many characters as you want on eBay and Craigslist," Carr said.

Twitter consists largely of news feeds and information from celebrities. "If newspapers can't make money at that, Twitter can't either," Carr said.

He says Twitter's market is people like fans of the Kardashian sisters. "When that's an example of your audience, you know it doesn't have legs," Carr said.

Heyman says Twitter may well turn out to be a strong and durable company, but there is no reason to buy its shares at the current inflated price. "Most of the time you have time before you step in," he said. "Don't get caught up in the emotions of the moment."

Facebook is an excellent example of that, Heyman says. "You had a year, and at least there were growing earnings." Facebook didn't exceed its IPO price for more than 12 months. "Think of Apple," Heyman said. "How many chances have people had to buy that stock?"

Carr says it could be a while before Twitter's stock sustains gains. "IPOs traditionally underperform over the first year, because they represent the transfer of ownership from smart money to dumb money," he said. "I think we'll repeat the pattern of Facebook, falling from the beginning."

Other social media stocks fell Thursday, Carr notes. "Twitter has a highlighting effect. These companies don't make much money."

Heyman says the Twitter tornado could represent the frenzy that signals a 5 to 10 percent correction for the entire stock market. "That would be typical," he said.

One thing that Twitter can be thankful for is that its IPO ran much more smoothly than Facebook's in May 2012. Chris Litchfield, a retired hedge-fund manager who is now a private investor in Greenwich, Conn., saw the difference up close and personal.

When he tried to get some Twitter shares through his Morgan Stanley account, he was shut out thanks to strong demand. The entire Morgan Stanley New York City office only got a "thimbleful" of shares, Litchfield was told.

But when he requested shares of Facebook last year, Morgan Stanley asked the day before the IPO whether he'd like to double his allocation.

Editor’s Note: 5 Reasons Stocks Will Collapse . . .

© 2014 Moneynews. All rights reserved.

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