Twitter stunned Wall Street with a big stock drop Thursday, but such reactions are surprisingly normal with much-hyped Internet IPOs that tempt investors to overpay.
Shares of the six major Internet initial public offerings since 2004 have, on average, dropped 4.1% in the first day of trading after reporting their first quarterly results, says Bespoke Investment Group. That's a strong negative reaction even though five of the six companies topped earnings-per-share estimates.
The 24% crash in shares of Twitter Thursday to $50.03 is certainly severe, as investors wrung their hands over the company's disappointing slowdown in the number of monthly active users. But Wall Street's reaction to Twitter follows a pattern common during the latest rash of high-profile Internet initial public offerings, including professional online networking site LinkedIn, social-network site Facebook and online deal site Groupon.
The typical sell-off of Internet IPOs following their first earnings reports, even though profit usually tops views, is a reminder of how investors routinely allow hype to lead them to overpay for tech IPOs. Bespoke's analysis looked at Google, LinkedIn, online radio station Pandora, Groupon, online gaming company Zynga and Facebook.
"Share prices for these growth stories reflect a market that gets ahead of itself despite relatively conservative estimates from the analyst community," according to the Bespoke analysis. The analysis of recent hyped Internet IPOs finds:
• Severe reactions despite seemingly good news. Facebook's shares fell 11.7% in the first day of trading following its first earnings report on July 26, 2012, Bespoke found. That severe downdraft happened even though the company narrowly beat earnings expectations and topped revenue forecasts by 3%.
• Strong gravitational pull lower for the stocks in the first week. Investors didn't shake off their negative feelings about Internet IPOs' first quarterly results overnight. Five of the six stocks Bespoke looked at were down in their first week of trading, falling 3.9%, on average, from the opening price the day they reported earnings.
• Optimistic guidance hasn't been a buffer. One of the six recent Internet IPOs, Groupon, raised its guidance for future quarters as it delivered its first quarterly results. Even a positive outlook couldn't save the stock from falling 14% in its first day of trading after reporting. The only recent Internet IPO to escape the downward pull was Google, which rose 15.4% on its first day of trading after reporting earnings for the first time on Oct. 21, 2004, Bespoke found.
The fact recent big Internet IPOs drift downward after they report shows the disconnect between investors' hopes and reality, says Francis Gaskins of IPO Desktop Premium. "Investors get overexcited by the top-line revenue increases," he says. "They forget companies must keep their costs in line."