Twitter's IPO is hot and not, and that's a problem

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(MoneyWatch) Twitter is primed to go public this weekat between $23 and $25 a share. That's up from the range it set earlier this month of $17 to $20 a share and would bring in upwards of $1.75 billion to fund growth at the microblogging site. The IPO is oversubscribed, which means that big institutional investors have already snapped up blocks of stock and will then turn around and sell shares to so-called retail investors -- the normal folk who never get invited in at the IPO price.

And yet, there are indications that people remember getting burned by Facebook's (FB) fall from IPO grace last year, and are cool to the siren call of fast wealth and easy money. That could wreak some havoc on the whole process, and keep Twitter's price from taking off the way some think it will. To understand why, remember how an IPO happens.

An insider's game

Twitter, its investors, and many insiders (either employees or people with strong ties to the company) are the ones selling shares at the initial public offering. The sales happen through underwriters, which are investment banks that try to promote the stock and attract interest from large institutional investors, like other banks and big pension funds.

Once the IPO officially happens, and the stock goes live, the big investors, banks, and underwriters all look to make a profit by reselling shares. Those are the shares that regular folk buy. One reason you hear a lot of hype about a company like Twitter is because people in the industry want individuals to get interested enough to buy shares.

The more interest in the stock, the more the price gets bid up within seconds after the IPO takes place, and the more money they can make. That's one reason the IPO offerings of stocks are often a thin slice of all that could be available. Perceived scarcity tends to make people assume something is more valuable, leading to their willingness to spend more. The Twitter crowd plans to sell just over 11 percent of the total number of shares. Given that the underwriters sold all of the available shares, they have the option to purchase another 10.5 million shares, giving them more opportunity for profit through reselling them.

It had been a typical pattern in big tech IPOs that there would be a good "bounce," or increase in share price the day of the IPO. But Facebook's IPO last year saw the opposite: an increasingly sharp drop in prices. That was a combination of being overly-hyped and concern about the company's mobile fortunes. It took more than a year for Facebook's stock to even regain the IPO price, let alone rise above it.

A yo-yo with no string?

In other words, there are two audiences for an IPO, and the really important one is you, the retail investor. Only if there are enough individual investors to get excited about owning shares, will there be a bounce and the profit that the insiders and institutions want. 

The IPO market has picked up this year, which is a good sign for the company. But there are some big concerns about Twitter, including the total lack of profit, slowing growth, and difficulty in monetizing mobile use. There is already a lawsuit by two financial firms claiming that Twitter planned a failed private sale of some shares to help shore up the stock's price.

Now a CNBC/AP poll suggests that ordinary investors are wary of Twitter. Almost 50 percent of active investors don't see the company as a good investment. The more money people have, the more doubts they hold. 56 percent of those making at least $75,000 annually doubt the value of the Twitter IPO. And a majority of younger Americans, who might be seen as Twitter's target demographic for users, also plan to hold off investing.

It could be a case of Yogi Berra's famous investing advice: If the people don't want to invest in Twitter, nobody's going to stop them. And if enough don't, it could make Twitter's stock an "overwhelming underdog."

  • Erik Sherman On Twitter»

    Erik Sherman is a widely published writer and editor who also does select ghosting and corporate work. The views expressed in this column belong to Sherman and do not represent the views of CBS Interactive. Follow him on Twitter at @ErikSherman or on Facebook.

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