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Finance professor says Twitter’s IPO boom made sense

Professor Bharat A. Jain

Professor Bharat A. Jain

When social media and business meet, the result is a worldwide frenzy over Twitter’s IPO. When the site’s founders announced an intention to become a publicly traded company, the talk turned quickly from 140 character messages to $26 per share analysis. Since its November 6 appearance on the trading boards, Twitter nearly tripled its share value before starting to drop back.

Any major tech company making a move to the public market has been enough to draw the attention of investors and casual users alike. Facebook’s IPO in May 2012 and LinkedIn’s IPO in May 2011 drew intense media scrutiny. The same has happened to Twitter, as analysts flock to call the company’s stock “overvalued.”

This fall, as Twitter prepared its IPO, WalletHub.com reached out to economists at universities across the country for analysis. Bharat A. Jain, a professor in the College of Business and Economics, offered his assessment.

“IPOs tend to occur during periods when equity market conditions are favorable,” he told the site. “Investors during these periods seem to be willing to pay high premiums for relatively unproven business models.”

Relatively unproven business models like social media companies.

Analysts like John Blackledge of Cowen Group say Twitter’s slide in recent days is centered on questions about whether it can grow revenue quickly. With Twitter use slowing down, it might have been bad timing.

“Issuers and venture capitalists try and capitalize on these windows of opportunity and rush through their offerings,” Jain told WalletHub.com. “The most recent year has been exceptionally favorable for equity markets, with the S&P 500 Index up over 20 percent. This has led to a large number of well received IPOs.”

Well received, but possibly not sustainable. Analysts still rate Twitter’s value above its IPO price, but at a much lower value than where it’s currently trading—it opened at $57.50 Friday after a height of more than $73. Cowen Group values it around $32. The volatility at the moment means the most anxiety for the folks who bought in early. Jain suggested a rule of thumb for deciding whether a company can survive long-term.

“An IPO can be considered successful if it is trading above its open price 12-18 months after the IPO.”

Twitter is set to release its first quarter results on Feb. 5.

 

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