The U.S. Stock Market continued its rally mode this past week as both the Dow 30 and S&P 500 indices set all time record highs. Our Fun Stocks Index also set record highs (up 565.70% since January 1, 2009, and up 61.55% YTD). Clearly more buyers were willing to assume greater equity risk despite the market’s high valuation levels.
Tomorrow the excitement over the Twitter (TWTR) initial public offering (IPO) begins when trading of its stock takes effect at around 10 am. The TWTR IPO is over-subscribed as many zealous users all over the world want to become owners of this global social media phenomenon. How high the stock price of Twitter will go in the first few days of trading will be a good indicator of the level of “irrational exuberance” or speculation in this 4-year stock market rally.
Twitter has an excellent business model and the potential — over time — to reap the profit rewards that a very loyal global user force can generate. However, starting at the IPO price of $26 per share gives it an initial $18.1 Billion valuation (fully diluted/when all shares are counted), which is too high. The fundamentals of Twitter can’t justify this valuation. However, the irrational demand to own its shares will dictate how high the stock price can go.
Buy some TWTR if its price remains below $30 per share and try to hold it for a long time. Buy more if — by some miracle — it falls below $20 per share.
Have a good investing week!
Disclosure: I have asked my broker for an allocation of Twitter shares at the IPO price of $26/share. However, this does not mean that I will receive any allocation.