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."

So the previous egg on the face of the companies that backed the issue of the IPO of Facebook may make the future of social media IPOs a bit more stable. One way to predict the future IPOs of other social media companies is the impending public offering of Twitter. After all reputation is an important part of building the trust one needs to invest in a company with no public history.

So it looks like Twitter might end up being a little bit more stable, along with any other social companies that go public in the future. But what about the long term? After all just because the initial offering is stable does not mean that it will stay that way. If you are going to keep your portfolio hot, you are going to have to be careful about what you keep and when you get rid of it.

Look at past social media companies as case studies," said Brad Hines, a finance expert. "Think Friendster and MySpace which practically became uncool over night, similarly Facebook is now said to be lagging with the 13 to 18 segment who seem to prefer SnapChat and Instagram - the hot social media flavors of the moment - that might also wane at any time to another network."

That does not mean, of course, that you need to dump a social stock at the first sign of flailing. Case in point: Facebook shareholders came over the hump of disappointment. The information for the most recent fiscal quarter showed a 21% growth in monthly active users, and the stock price at the time of the writing of this article was $47.19, which is up from the $38 from the generally considered unstable IPO price. So in the end you are going to have to treat any social media IPO the same way you would treat any hot stock. It comes with a big risk, and the potential with big rewards. You just have to treat it right and keep a keen eye on the valuation.

--Written by Katie Gatto for MainStreet

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