Seven year old Twitter finally has its long awaited IPO today- offering 70million shares for $26 each under the ticker TWTR on the New York Stock Exchange, which will value the firm at nearly $18Billion.
Option traders have to wait a week to get a crack at TWTR puts and calls, which will be listed on November 15, but many in the business expect TWTR to provide as much excitement as Facebook did back in May 2012- hopefully without the technical glitches Nasdaq experienced on that frenzied IPO day.
Since the Facebook case is so recent and both firms fit into the ‘new economy’ model, it’s worth a closer look at FB options flow to gain some insight into how the TWTR IPO is likely to play out.
The FB IPO was underwritten by Morgan Stanley, with so much public interest for shares that the size and price of the deal were hiked several times to meet demand. Shares spiked from the $38 IPO price to briefly touch $45 on day one- but it quickly became evident that the hype had backfired, and shares were well below the IPO level within a few days. Similar to the TWTR timetable, options were listed a week later with great success- setting a new record for day one option flow, 365,000 contracts!
FB shares spent nearly 18 months below that $38 IPO price- but they got a huge boost after earnings were released in July- spiking 29% from 26 to 34 and they finally surpassed that $38 IPO level in August 2013. While I will not attempt a valuation analysis on FB- in my view the continued popularity, user growth, and earnings growth is what finally convinced investors that FB had the kind of future that could justify a $120Billion market capitalization. A snapshot of range data for FB shows what a good ‘trading name’ the ticker has been this year- setting records all over the place! Total FB option volume 2013 YTD is over 70 million contracts, which is nearly 4% of all listed equity option flow this year (correcting for dividend trades.)
In the case of TWTR, the hype has been a bit more carefully managed- in order to avoid the kind of exuberance that contributed to FB’s initial slump, and I’d expect that Goldman is being extraordinarily vigilant to ensure IPO allocations see very minimal ‘flipping’ which can add to downward pressure on share price. Early analyst views on TWTR appear to be bullish- with Cantor setting a $32 price target based on expectations that the unprofitable company can grow its way to positive returns.
I recently met a professor who studied the performance of share prices after their IPOs, and how the listing of options appears to have a direct impact on share price. While Facebook was not included in the time period studied, the author, Chayawat Ornthanalai of the University of Toronto, found a very intriguing negative correlation between option listing and share price- in fact, their paper concluded that the purchase of deep-in-the-money puts was a profitable strategy, at least for their time period and sample set.
I expect TWTR shares to be more stable than FB- primarily because of FB’s track record – which at yesterday’s $49 close, represents returns near 28% for IPO participants who held on to their positions. Based on professor Ornthanalai’s work I’d be a bit cautious jumping into a long position, but I do expect some compelling risk-reward opportunities once the options are listed. And with Facebook options now the most active single stock (they surpassed Apple last month!), it’s likely TWTR will keep many market participants busy for the rest of the year.
Note: This article appeared on TheStreet.com as part of their Options Profits premium service.
Writer has no holdings in securities noted.