- Tech companies post their IPOs have gone through 4 phases: Euphoria, Pessimism, Optimism, and Realism.
- Twitter is in the ‘pessimism’ phase, and price trend when compared to post-IPO performance of Facebook and LinkedIn shows upside pTecotential.
- Even though Twitter’s price trend is scarily close to Zynga’s, Twitter is unlikely to have significant decline in revenue like Zynga did, and hence unlikely to follow the trend.
Recent technology IPOs have shown some similarities in their post-listing price movement. They all seem to have gone through 4 phases – 1) Initial ‘euphoria’ with everyone trying to get their hands on the shares, and with analysts setting unrealistic expectations and justifying high valuations; 2) A state of ‘pessimism’ after companies fail to meet the early unrealistic expectations, and a reduction in exposure by funds and institutions; 3) ‘Recovery and optimism’ once the company starts beating the low expectations, and 4) ‘Realism’ setting in, and the stock trying to find its fundamental value.
To prove the above hypothesis, I looked at post-IPO price trends of some recent technology IPOs. For the ease of understanding, the day 1 closing price (and NOT the IPO price) is indexed to 100.
There are several other factors that could have affected the price trends and the day 1 closing price, including availability of quality tech stocks at IPO, geopolitical situation, and economic activity. However, we ignore these for the purposes of this analysis.
In the chart below, we can see how LinkedIn (NYSE:LNKD) could be in phase 4 and is trying to find its fundamental value, while I believe that Facebook (NASDAQ:FB) is still in phase 3. On the other hand, arguably Twitter (NYSE:TWTR) is still in phase 2, and will eventually move up.
Source: Own Analysis, Yahoo Finance
You could however see a different story when you compare Twitter to some other IPOs – Groupon (NASDAQ:GRPN) and Zynga (NASDAQ:ZNGA). In the chart below, you can see how Twitter’s performance is scarily close to that of Zynga’s, which could mean further significant downside for Twitter.
Source: Own Analysis, Yahoo Finance
However, Zynga has struggled to grow its revenue since its IPO. In the chart below where first quarterly revenue figure post IPO is indexed to 100, you can see that Zynga’s quarterly revenue has declined significantly over the last 3 years, and in fact revenue in Q1 2014 was half of that in Q4 2011 (first quarter post IPO). On the other hand, LinkedIn’s revenue has increased almost every quarter since its IPO, and I expect that by increasing focus on monetisation of usage of its 250+ million users, Twitter can show a similar growth trend. Analysts expect Twitter to grow its revenue from $1.3bn in 2014 to $2.1bn in 2015, and EPS from 4 cents to 25 cents (source: Yahoo Finance).
Source: Own Analysis, Published Results
My intention here is to provide you with another angle to combine with your fundamental view on the stock. My love for the product as a user and advertiser makes me optimistic about the future of the company, but the stock needs some triggers to start moving up again. Remember Facebook fell 50% from its $38 IPO price to $19 before reaching the current $60. I’m planning to accumulate Twitter in coming weeks.
Disclosure: I am long FB. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: I may initiate a long position in Twitter in coming weeks.