“What’s the deal with social networking stocks?”
Mike’s frantic email read like an investor who risked far too much.
“I risked $25,000 — my savings account — on the Facebook IPO, and it’s down by nearly half.”
What could I tell him?
"Better luck next time?"
The problem with social networking IPOs is that foolish investors — giddy with profit potential anticipation — are placing high valuations on social networking companies because they think the sector can’t fail.
But as many are learning, these public social media companies can and will fall.
So when I heard that Twitter wants to IPO in 2014, I called my buddy Mike to tell him the news. “Maybe it’s because all the “cool kids” are doing it. Who knows,” he said. “I’m not buying.”
And I agreed.
What I know – without doubt – is that a Twitter IPO will crash and burn, as the “over hype” begins.
Twitter has already been valued at $11 billion, up from $8 billion in August 2011. Bulls are already well… atwitter hearing this from Max Wolff, Greencrest Capital’s chief economist, who once likened Facebook stock to lottery tickets.
Others believe an $11 billion valuation is fair, as it’s estimated the company can bring in close to a billion in ad revenue in 2014.
But we’ve all seen this song and dance before.
They hype is built on stilts. The big guys on Wall Street profit. And the little guys get stuck holding the bag. I’ve seen this scenario play out with several social media IPOs.
Nothing will change.
Heck, if Facebook (FB) were smart, it’d shelve any plans to IPO, I said in late 2011.
“In what’s likely to be a dramatic first day of trading, investors would be smart to pay close attention to the downward death spirals of Facebook’s buzz-heavy competitors.”
That fell on deaf ears, though, as retail investors ignored the advice for a stock trading at 100x earnings, 25x sales, and a $100 billion valuation. Wedbush went so far as to initiate an outperform rating on the stock prior to IPO.
Stern Agee foolishly initiated a Buy rating in the weeks leading up to the IPO.
On day one, though, the stock closed about 25 cents above its IPO price. It fell 12% on day two… and came down even more in the days following.
The Wall Street experts predicted that social media giants would be the “next big thing” for big investment houses.
The future was bright.
Zynga (ZNGA) now trades at $3.36 after $16 highs.
Facebook recent hit sub-26 lows after a $45 IPO.
Shares of Groupon (GRPN) now trade at $6 a share after a $30 IPO. The stock is beginning to show some signs of recovery, though. In fact, subscribers to The Cheap Investor were notified about the stock’s potential in December 2012 at just $2.90 a share.
Unless you have friends in high places, it will be impossible for retail investors to get in early on Twitter on day one.
But that doesn’t mean you can’t get in months ahead of time.
One, you can trade the First Trust IPOX-100 Index Fund (FPX). This fund tracks the U.S. IPOX-100 Index, which includes the 100 largest, typically best performing, and most liquid IPOs in the U.S. The index measures the average performance of U.S. IPOs during the first 1,000 trading days.
Before Facebook went public, the FPX traded around $25. It moved to $29 shortly thereafter. Before Groupon and Zynga went public, the FPX traded around $22. It jumped well above $28 months later.
We expect to see a similar move higher as we get closer to a Twitter IPO.
The Global X Social Media Index ETF (SOCL) is another way to trade Twitter ahead of IPO. Its performance has been just as impressive as FPX.
You heard it here. Do not buy shares of Twitter. It will crash and burn just as its competitor IPOs have.