Twitter Inc's IPO: Golden Ticket Or All Hype?

The Motley Fool

A version of this article was first published on

WASHINGTON, DC -- Twitter (NYSE: TWTR.US) is going public in the near future. The company has made the official announcement. The New York Stock Exchange recently ran a test of the short message company's IPO, and that was declared a success. Many investors, however, are taking a leery eye to the company going public. If you were one of the investors who got burned by the IPO of Facebook or just witnessed the fallout, then you may be less interested in Twitter.

Will Twitter be different?

Many people are worried about what is going to happen with Twitter. When Facebook's IPO went awry, it created many angry investors. The company came out with a seriously high IPO number, people thought it was the beginning of a second golden age of tech stocks. Analysts over at Morgan Stanley were projecting that the stock would continue to go up from its $38 IPO price. However, the folks over at The Wall Street Journal begged to differ. The company has come to a stable point now, but not quite the renaissance some investors were hoping for from the IPO.

Will Twitter be different? Yes, because things are being taken from a more cautious point of view.

The value of a test

The New York Stock Exchange took at a stab at what the IPO may look like in the future. The exchange considered the test a success, because they were able to work out some of the technical flubs that were causing problems during Facebook's launch. Of course, it will not change much of the valuations, but it is good to know if you are considering investing in the company on day one.

Cautious move toward stability

When it comes to IPOs, the lay of the land has always been a little bit unstable. There is a big initial fanfare and then things mellow out. With properties as hot as social media companies, which get a lot of press time, things can be a little bit out of control.

So how seriously should you look at an IPO as a measure of the performance of a stock, or its performance for the first year of life? Well one expert, Professor Gerard Hoberg of The University of Maryland, warned: "In past decades, evidence shows IPOs are poor investments on average. However, this no longer appears to be the case. Although they are volatile investments, IPOs tend to perform about as well as seasoned industry peers on average. I don't expect today's IPOs to be any different."

So when it comes to IPOs, the odds are good that you should invest only if you believe that the company will be stable in the long term. Do not just get on the trend because it is trendy. If you do, you might just find yourself with a stock that you have to sell short. Think of it as a cautious step toward stability, or growth, of the stock in the future.

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> Katie has no position in any stocks mentioned.