Investor hype does not spell long-term success for Twitter - report

By Staff Reporter

Nov 10, 2013 02:25 AM EST

An article written by an industry observer on Forbes said the initial public offering of Twitter Inc indicated a predictable failure in the future for the company. Despite careful steps launched by the microblogging service company prior to its debut on the New York Stock Exchange, the article said Twitter would not likely be successful as a long-term buy and hold security. Citing historical data from Dr. Jay Ritter, a popular finance professor and IPO expert, Hersh Shefrin pointed out three important lessons from Twitter's IPO in his article.

Initial underpricing, Shefrin said is a phenomenon wherein shares typically close just above its offering price on its first day of trading. Shefrin said wherein most companies get an increase of between 7 to 15% from their offer price, stocks of technology companies typically get a 65% premium.

"That first day price pops are not synonymous with long term success is a psychological illusion. And the hype producing first day pops is easily generated for companies everyone knows," Shefrin said.

Moreover, Shefrin said long-term underperformance of stocks are usually attributed to investors who do not know when to let go of their interests due to unrealistic hopes. Shefrin said investors who would purchase stock on its debut and sell them after six months would fare better than investors who purchase the stock at the same time but sells them at more than six months.

Lastly, Shefrin said existing shareholders of a company who got listed would typically part a portion of their interest to raise new funds.

Twitter's situation was reminiscent of other overhyped companies. VA Linux Systems saw its shares increased a record 700% in 1999. The company later on exited from its core business in 2001. Palm opened at USD165 per share in 2000, which was a significant premium from its USD38 per share offer price. However, Palm was not able to generate profits, until it had to sell itself to HP.

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