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The Twitter (NYSE: TWTR) hype machine is in full gear, and the first trades are now indicating $45, up 73% from the $26 pricing last night.
If the stock market were a pinball machine, it would read “tilt.”
Twitter’s gross revenue is slowing. It’s up only 6.1% in Q3 2013 from a year ago versus 10.6% in 2012 and 17.1% in 2011.
Net losses are also growing. The company reported a net loss of $133.9 million Q3 2013 versus a loss of $70.7 million in Q3 2012.
The user base is only 232 million a day versus Facebook which is running north of one billion. This may not be a big enough customer base to support the advertising that everybody thinks is going to propel Twitter to stratospheric levels.
The demographic is skewed. Facebook is arguably balanced across a much wider demographic. Twitter is young people and small emerging markets where there’s very little consumer spending power.
And finally, Wall Street has valued the Twitter IPO at $26 in an effort to avoid getting “Facebooked.” Yet, European pre-IPO warrants trading the night prior to the opening suggest a range of $37 to $45 a year from now.
That bothers me because I know what goes on behind the scenes…
Roughly 90% of Twitter shares went to institutions, which leaves about 10% for individual investors. If you recall that trading is about supply and demand, what this suggests is that there was very little supply available to the retail markets when they opened. Of course the price is going to go up.
Brokers, meanwhile, are calling their clients and using Twitter as a marketing tool.
The speech will be something like this if they had shares: “See what a great job I did for you? Don’t you want to give me more of your money?” And, if they didn’t have shares: “See what you missed? Give me your money so I can get shares for you next time.”
Meanwhile, the investment banking houses are holding shares and talking with other pre-IPO companies saying much the same thing – but with a twist, “Hey, we were good guys. We held out shares and keep them because we believe in you. So give us your next hot offering.”
In reality, the other side of the house has already moved options and created synthetic instruments that effectively sold shares anyway – to unsuspecting retail investors at far higher prices.
In contrast to individual investors who hope Twitter becomes the next ten-bagger, Wall Street doesn’t care. Whether or not prices keep going is immaterial to them… the first sale locks in their profits. That becomes “everybody else’s problem” down the road when reality sets in.
At the end of the day, I worry that retail investors are going to clamor to buy something for which there is no logical business model save the “potential” that has all the seductive allure of an illegal drug.
Don’t get me wrong; I’ll take the rally and the upside because I love making money off other people’s greed, but I feel bad that millions are going to buy something they are ill-equipped to value properly.
Just give me real business products with real results, real earnings, and dividends anywhere in the world any day of the week.
Now take a look at an investment Fitz-Gerald thinks is worth it – so much so that the potential makes him drool…