Should You Worry About Social Media IPOs?

NEW YORK (MainStreet) — A lot of hot social media companies are going public, or at least planning to do so in the future. This brings in mixed results--no matter how addictive the outlets may be for the everyday user.

The question is should the average investor even worry about these events? Is it worth it even to consider buying the stocks? Facebook, and Twitter have started the trend, but other companies will undoubtedly take to the open market as time goes on. Are these public offerings the next great investment opportunity or are they a serious gamble?

In the end the idea of getting in on the ground level of a hot web based company is one that has a certain appeal, as many investors want the cachet of a hot stock in their portfolio. Most of us remember the Facebook, which launched to fanfare in the spring of 2012 and then disappointed. Now Twitter is in on the IPO act. The company, in a recent, now-famous tweet said, "We've confidentially submitted an S-1 to the SEC for a planned IPO. This Tweet does not constitute an offer of any securities for sale."

Will the company have success or dashed hopes? Gerard Hoberg, a finance professor at University of Maryland, puts the answer to that question in the following context.

"IPOs perform better when the underwriters backing the transaction are more prestigious," he said. "Goldman Sachs's lead role, with other blue chip underwriters like Morgan Stanley and JP Morgan, indicates the Twitter IPO will be well priced at its launch and thereafter.

Of course, we know the Facebook IPO was a recent example of a botched result but may have served as a teaching moment.

"I would expect that the underwriters have learned from that experience and will work doubly hard to ensure Twitter's launch is a decisive win for IPO investors," Hoberg said. "These underwriters are fully aware that a second weak IPO launch will tarnish their blue chip reputations, so they will likely build in an extra precautionary discount into the initial pricing, and more market stabilization into the aftermarket."