Twitter IPO: Smart money on the sidelines

Congratulations if you were one of the lucky investors to get in and out of Twitter shares last week as they hit Wall Street at $26 and surged past $50 before closing their first day of trading at $44.90 last Thursday. The social-media darling, which doesn't foresee a profit until 2015 at the earliest, sold 70 million shares, raising $1.82 billion. Notice we said “lucky,” and not “smart.” Smart investors stayed away, and for good reason. To be sure, some early investors in Twitter, such as venture capital and private-equity shops, were in on the initial public offering, but that is because they had skin in the game back before the idea of an IPO was ever hatched.

IRRATIONAL EXUBERANCE

Smart investors, with an eye on the long term, were on the sidelines, observing the frenzy with detached calm, comfortable that they knew better than to get swept up in the irrational exuberance of the hottest tech stock IPO in more than a year. The last big technology offering, remember, was the ill-fated $16 billion Facebook Inc. deal in May 2012. Priced at the top of its expected range, the stock opened at $38 and dropped — and dropped some more. Four months later, shares were down by more than 50%. It took more than a year to get back above the IPO price. The story for other high-profile tech IPOs isn't much better. Group-on Inc. is off 50% from its 2011 IPO price, and Zynga Inc., which also went public in 2011, is down about 63%. Financial advisers worth their salt should be counted among those smart investors holding off on investing in these offerings. Beyond the fact that the shares are whipsawed by sentiment more than fundamentals, many of these companies are still trying to figure out how to make a buck. And how long will investors pump up the stock of a company that isn't profitable? Remember Pets.com or Webvan? And the buzz isn't over now that Twitter is public. This week, digital-education service Chegg Inc. and Zulily Inc., an online seller of apparel for moms and kids, are set to make their debut, according to Bloomberg News. Early next year, Care.com Inc., which owns a website used to find baby sitters, plans to go public. So let other investors take the risk. Stick to the investment plan and keep the emotions at bay. Your clients will thank you.