Bubble fears amid Twitter IPO craze

washington — Twitter’s highflying Wall Street debut drew attention to the growing power of social media, but it has also raised concerns about a potential bubble in the sector.

Opening-day gains on Thursday of more than 70 per cent after its initial public offering, or IPO, stirred memories for some of the dot-com boom-and-bust of the late 1990s.

Even some admirers of the popular messaging platform said the outsized gains were unsustainable and that investors should bail out.

Some of the enthusiasm faded on Friday. Twitter shares fell 7.26 per cent to close the week at $41.65. The shares had jumped 73 per cent on Thursday from the $26 opening price to close at $44.90.

Daniel Ernst at Hudson Square Research issued a “sell” recommendation, saying Twitter is “more than fully valued”, and priced at 600 times its projected earnings before depreciation and other charges.

“One cannot argue the market does not ‘get’ Twitter,” Ernst said.

“There seems to us no upside scenario not already more than included in Twitter’s implied growth outlook... We believe too much emphasis in the public discussion on Twitter’s valuation has centered on softer metrics like sales and users [eyeballs], and not enough on profits.”

The splash from Twitter has sparked talk of IPOs from rivals such as Pinterest, the photo-sharing social network, and Square, a payments platform for mobile devices led by Twitter co-founder Jack Dorsey.

Research firm Dealogic said 41 US listed technology or Internet IPOs have raised $7.8 billion so far in 2013.

That is down from $20.5 billion in 25 deals last year at the same time, although Facebook accounted for $16 billion of that. The peak full year was 1999, when 373 IPOs raised $39.9 billion, the research firm said.

Analysts are divided on whether the market has become overheated.

“It is reminiscent of the dotcom bubble, but this time the companies seem real, so it isn’t clear to me that the bubble will break,” said Michael Pachter, head of equity research at Wedbush Securities, who follows emerging tech companies.

“Facebook and LinkedIn have demonstrated that there is power to these models.”

Still, Wedbush issued a “neutral” recommendation for Twitter, with a price target of $37 — well below the opening day close.

Wedbush’s report said Twitter is “in the early innings of its growth” and “has barely scratched the surface of its potential user base.”

But Pachter wrote that the “valuation is extremely difficult” because of uncertainties about growth in advertising, and Twitter’s costs in marketing and research.

“We think that an early investment in driving increased usage will pay dividends in future years, but we aren’t prepared to forecast positive net income for next year,” he wrote.

Lou Kerner at the Social Internet Fund said it’s not fully clear who will be the winners and losers in this emerging sector.

“We’re in a period of time where investors are more focused on the upside opportunity than the risk,” Kerner told in an email. —