Why Twitter’s IPO ‘Pop’ Could Fizzle for You

To chase or not to chase? That is the question as Twitter’s stock (TWTR) makes its market debut Thursday. With IPO shares finally priced at $26 each, there are almost certainly frustrated investors out there who weren’t allocated what they believe was enough stock from underwriters – and others who were shut out of allocations at that initial price altogether. Those traders should help propel the stock sharply higher when it starts trading.

Even so, any traders or speculators out there looking for the kind of huge first-day “pop” in trading that was almost routine back in the glory days of the dotcom market might want to rein in their expectations for Twitter’s debut.

RELATED: TWITTER’S IPO: THE NUMBERS YOU NEED TO KNOW

A healthy “pop” these days is likely to be in the double digits; the average first-day rise for U.S. IPOs this year has been 17 percent, according to The Wall Street Journal. An extraordinarily sought-after stock might double or more in its first hours of trading. But anyone hoping that Twitter will soar to $70 or $80 by Friday is likely to end up disappointed.

In part, that’s because Twitter’s valuation is already extremely rich. As we discussed here earlier this week, the IPO has been carefully managed – heck, let’s call it stage-managed – by underwriters led by Goldman Sachs. The company’s shares were almost deliberately underpriced in the first stages of the deal, during the road show.

Only in the last few days, once buyers had been lured into expressing interest, did the company and its bankers toss that conservative approach to the wind, boosting the initial range of $17 to $20. They raised the range not to something like $20 to $22 (the traditional kind of move) but all the way to between $23 to $25. And then they priced the offering even higher, valuing the company at $14.2 billion.

At the $26 initial price, the deal wasn’t just sweetened but super-sweetened. After setting out to woo investors by suggesting shares would be priced at a discount to Facebook’s (FB) shares, on a price-to-sales basis, the $23 to $25 range put Twitter’s stock at 11.8 times estimated 2014 sales, a premium to Facebook’s price/sales ratio of 11.4 times.

Nonetheless, some investors still figure that Twitter shares will be worth $43.60 by the end of trading Thursday. If they are, it will be because of momentum, not valuation. In other words, people will be chasing Twitter higher.

RELATED: THE BIGGEST IPOs IN HISTORY

Which brings me back to my initial question: Is it ever OK for investors – real investors, I mean, and not speculators or short-term traders – to chase a stock as its price soars into the stratosphere?