Twitter’s stock has been on a frenzy recently. On it’s first day, the stock shot up 73%. Since then, it has continued to climb roughly 63% higher.
In most investing publications, this “IPO pop” is seen as a success. But, I disagree.
Here’s why:
- The main purpose of an Initial Public Offering (IPO) is to raise capital for a company. The money is raised by offering shares of the company to the public. Underwriters help the company determine the appropriate IPO price per share, based on demand.
- For Twitter, the IPO price was set at $26 per share (very few people get to purchase the stock at this price).
- Twitter raised a total of $1.82 Billion by issuing 70 million shares. The underwriters (Goldman Sachs, Morgan Stanley and JP Morgan) collected $59.2 Million in IPO fees.
- The stock opened at $45.10 and closed at $44.90, representing a 73% jump.
- At $44.90 per share, those 70 million Twitter shares are worth $3.14 Billion.
- But, Twitter only received $1.82 Billion.
- Nearly 2 months later, Twitter is trading at $73.31.
- Those 70 million Twitter shares are now worth $5.13 Billion.
- But, Twitter only received $1.82 Billion.
- To put it into perspective: Imagine you own a duplex. You live in one side and rent out the other. In an effort to raise some money, you decide to sell the half you’re not living in. So, you hire a real estate agent. The agent says, “I’ll sell it for $100,000” and you accept. A few hours later, the house is sold again for $173,000. Then, the property is sold again 2 months later for $280,000. You may be excited about the increased value of the half that you still own, but don’t you also feel robbed? Exactly.
How about 1 more bullet point just for kicks?
- As of December 26, Twitter has a market cap of $40.7 Billion. In other words, Twitter (who has not made a dime in profits) is worth more than Target.
