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Investors should be careful with Twitter IPO

Assistant Professor of Finance & Behavioural Science Constantinos Antoniou, of Warwick Business School, is an expert in the behaviour of investors around IPOs. He gives his views on Twitter's latest move.

Dr Antoniou said: “There will be a lot of interest in the Twitter IPO, but investors have to be careful because the large volatility in performance experienced by other social media companies like Facebook points to significant risks in their ability to profit from their huge customer base. Furthermore, history tells us that, on average, IPOs are not a good investment in the long term. This is attributed to over-optimistic investors who over-estimate the earnings potential of these companies (which do not have a track record and therefore predictions are difficult). A further similarity between Twitter and Facebook in this regard is that both of them are ‘famous’ companies used by many people, and a typical mistake investors do is to equate a good company with a good investment (not true of course). There are always golden IPOs like Microsoft but these are extremely rare so investors should avoid the grave mistake of equating a ‘famous’ company with a good investment.

“Also, the effectiveness of advertising on Twitter is not clear - when people are in interacting/socializing moods advertising has been argued be to less influential. So even though potential is there due to the large customer base it is not without significant risk.

“Twitter’s IPO is happening in a period that the market is, overall, more optimistic about social media companies. So they may avoid the poor performance experienced initially by Facebook. However, this does not mean that Twitter is a great investment opportunity. This depends on its ability to monetize its customer base, and of course the offer price. Twitter is very accessible on mobiles, something which is regarded by the industry as important in creating value. However, in my opinion there is still a significant risk, since the effectiveness of advertisements could be even smaller on mobiles (small screens, etc).”

To contact Dr Antoniou, call Ashley Potter, Press Officer, Warwick Business School, +44 (0)24 7657 3967, +44 (0)7733 013264, Ashley.potter@wbs.ac.uk