In 2013, Twitter was the hottest IPO since Facebook. It debuted in November of that year at around $40/share. Revenue was $665 million and operating income was negative -$635 million. Today, revenues have grown to $3 billion and operating income has swung to a positive $453 million. But its share price as of this writing? Still ~$40/share. Even though the result has been nearly identical to that of stashing cash in your checking account, the journey has been far from it. After initially popping in exuberance to over $70/share, TWTR collapsed into the ‘teens. If we did this retrospective two years ago2, the number I’d be quoting you would be $15/share.
As an added twist, TWTR shares outstanding were 588 million back in 2013. Shares outstanding as of Q1 2019 is a much heftier 768 million. For all the media attention about companies supposedly wasting money buying back record amounts of their stock, the other side of the equation is that companies, especially Silicon Valley based tech companies, are voracious issuers of stock options that often outpace buybacks. The buybacks exist mostly to prop up share prices which are then sold into the open market by insiders.
This is how it works: you’re upper management. You get stock options. When the options vest, you exercise and thereby create more inventory of stock. Then the company spends money to buy back shares, partially reducing the inventory of stock. The net effect is you have more money and the company has less. You essentially got paid by the company, just in a circuitous manner. In the meantime, the shareholder has been sneakily diluted all the while the company is trumpeting how generous its buybacks are and how shareholder friendly it is.
The point is, if you buy a hot IPO stock based on hype, you are probably getting suckered. Some IPOs turn out well, but most don’t. It’s simply not designed for the public to get rich off of. It’s designed for founders and early investors to cash out. It’s designed for investment banks to reap fees and dole out favors to their lucrative clientele. It’s designed to create a new type of currency (stock options) to “attract and retain” employees. As far as stakeholders go, Joe Investor is just about damn near the bottom rung of the ladder.
If you’re a long term investor, you can afford to watch and wait. Every world-beating common stock in the past decade or two, be it Apple or Amazon or Netflix at times experience dramatic declines. Twitter languished for years below 50% of its IPO valuation. Even Facebook’s IPO was widely considered a flop back in 20123. Shares opened at $40 in May but by August it was below $20. Since then: 10-bagger. The moral of the story is, if you really like a public company, eventually you will have a chance to buy its shares. Just probably don’t do it on the first possible day (or week, or month).
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1http://blog.incandescentcapital.com/2013/11/the-ipo-of-twitter-to-buy-or-not-to-buy.html2And, perhaps, if it were not for a certain "Tweeter-in-Chief" ascending to the Oval Office in 2016…
3https://money.cnn.com/2012/05/23/technology/facebook-ipo-what-went-wrong/index.htm
