When Twitter made its debut on the public market this past Thursday, its initial price pop generated significant enthusiasm among investors. But despite this hype, several Harvard professors interviewed this week suggested that the social media giant’s stock might not be worthy of your investment.
Though the stock closed at $44.90 per share at the end of the first day of trading, about 73 percent above its initial public offering price of $26 set the day before, the future prospects of those who bought in remain unclear. While Twitter’s current business model derives some revenue from advertisers, it does not currently earn enough to turn a profit.
Jesse M. Fried ’86, a Harvard Law School professor who focuses on securities regulation and other corporate issues, pointed out that Twitter’s initial investors likely included those who were most confident about the company’s prospects.
“If Twitter were to auction off one share, it would go to the most optimistic person about Twitter,” Fried said. “The price that that person would pay for that share is not necessarily what a hundred people are going to pay for Twitter’s shares when all of the shares get released.”
Stock prices in the week since the company went public appear to align with Fried’s theory. Twitter’s stock closed at $41.90 on Tuesday, about 7 percent less than Thursday’s closing price.
Though it is too early to predict whether or not investors looking to sell in six to 12 months will benefit from the tech startup, Harvard Business School associate professor Lauren H. Cohen said that most IPOs end up underperforming.
“IPOs tend to be overvalued and have low returns in the first year,” Cohen said. “I wouldn’t invest in an IPO unless it were a small part of a diversified portfolio.”
Cohen pointed to a 1991 study conducted by University of Florida finance professor Jay R. Ritter, which concluded that IPOs are statistically likely to underperform similar firms over a period of three years.
Twitter’s public offering raises questions about how the company’s business model might change to begin earning profit for investors, according to Fried.
“They don’t just have to succeed,” Fried said. “They have to succeed in a big enough way to generate enough profits to generate the market capitalization that they have.”
Jonathan L. Zittrain, director of the Berkman Center for Internet and Society, expressed optimism in an email on Tuesday that Twitter might be able to achieve the necessary changes.
“Twitter's real power is that it's a platform,” wrote Zittrain, who also holds appointments at the Law School, the Kennedy School, and the Faculty of Arts and Sciences. “If you're ‘microblogging,’ chances are good you're using Twitter to do it, and the company controls the APIs in and out, so third party apps are dependent on Twitter's goodwill.”
Adding that this control will be the factor that establishes Twitter’s value, Zittrain said it will “push the company to have to reconcile stockholders' clamor for its hegemony with its embrace of free speech and open standards.”