Friday, September 13, 2013

Twitter is already trading in the grey market

I remember getting a call from a broker to buy Facebook 3 months before the IPO.  Insiders had some shares to sell and were marketing them. Fair enough. This happens all the time with private companies and their employees.  I thought a lot about buying stock, as there was a ton of hype regarding Facebook at the time.  But in the end, I decided not to participate.  

FB's IPO was eventually priced @ $38.  On the first day of trading, it opened @ $42.05, rallied to $45, tested $38 and closed @ $38.23.   The next trading day it broke price and melted to $26 over the next month.  It actually touched $17.55 a share 4 months later.  I did the math and I would have lost money even if I flipped my shares @ $38 on the first day of public trading.

IPO's involve a seller and a buyer.  Yeah, no kidding.  But my point is that investment banks have a choice on the valuation they put on a new security.  Which side of the transaction will get the better deal?  The seller is their investment banking client.  The buyers are their retail and institutional customers. 

Twitter will go through the same process as Facebook.  

According to Business Insider, Twitter's privately held shares are currently trading in the grey market as high as $30 and as low as $16.  

Michael Pachter, an analyst at WedBush Securities, said Twitter is now valued at $15 billion to $16 billion based on buying in the private market.

“Over the last couple of months, shares in the secondary market have risen to between $20 and $30. That’s what the private market values it right now, not that investors have any information, but that’s what they are willing to pay.”

Goldman Sachs is leading the underwriting,  JPMorgan Chase and Morgan Stanley will also likely have a role.

Business Insider noted yesterday that a $20 billion valuation of the shares would put Twitter at about 17 times revenues — which seems steep but puts it right where Facebook and LinkedIn are trading.

So if you get a solicitation to buy Twitter anytime soon, realize that markets have become incredibly efficient and your best choice may be to wait until the secondary market does the pricing for you.  

Maybe by then, the hype will subside and natural market forces will get you a better entry price.  

For example, FB, currently @ $45, has more than doubled off the $17.50 lows it hit 4 months after the date of it's IPO.

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