by Ed Elfenbein | November 12, 2013 2:42 pm
Just about everything that could be said about Twitter’s (TWTR) IPO has been said. Still, I wanted to add a few scattered thoughts.
Twitter is another good example of a stock where fundamental analysis is basically useless. By any reasonable valuation metric, Twitter is vastly overpriced. That’s not a novel insight. However, that doesn’t mean Twitter’s stock won’t do well.
The reason is that fundamental analysis assumes a level of environmental consistency that doesn’t exist in Twitter’s business. Who knows what their business will look like in a few years? Yet I have a pretty good idea what Harris’s (HRS) business will look like. This is why I’m staying away from Twitter. I simply can’t offer a reasonable estimate as to what their profit will be. But I do wish them well.
After a big IPO like Twitter, you often hear that the company “left money on the table.” Perhaps. But I think that misses a few key points.
Remember that Twitter floated a relatively small amount of shares. Look at it from their point of view. One issue is that the company has a lot of people working for them who were paper millionaires, and their wealth was very illiquid. The company doesn’t want to alienate long-time employees. Now that Twitter is public, those people are much wealthier, and even factoring in a lock-up period, their wealth is far more liquid than it was before.
We also have to consider the major benefit of an inflated stock price. Twitter can now print money for free which they can use for acquisitions. In other words, their shares are a currency. Every central bank in the world longs for this. Expect to see Twitter roll up a lot of small tech firms, and they’ll use their stock to close the deal.
When looking at stocks, we often talk about price versus value. But this is a good example of the two concepts blurring. An elevated stock price is itself a boost to value because it can aid your financial strategy. I wouldn’t say that a rich valuation can turn a bad company into a good one, but it has helped many good companies become better.
There isn’t much better defense than owning stocks of firms that know what they’re doing.
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