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Good News for Twitter IPO: Small Investors Are Skipping It

Aaron Pressman
The Exchange
Twitter is going public

Individual investors got burned on Facebook (FB), but because a lot fewer of them know and use Twitter, they’re much less interested in buying shares of the next big initial public offering in tech.

It sounds like trouble for Twitter’s IPO, which is expected to be priced after the market closes on Nov. 6. So why then did Twitter just raise its price range for the offering to $23 to $25 a share from $17 to $20?

Because healthy demand from the professionals who manage trillions of dollars of mutual funds, hedge funds and pension funds likely will help the IPO succeed. And the combination of strong institutional interest and relatively weaker retail buying in fact may help Twitter shares have a smoother long-term run.

Underwriters of the IPO encountered strong interest from institutional managers last week, after Twitter executives went on the road to present their financial data and strategic plans in closed-door private sessions for big investors, Bloomberg reported.

In contrast, individual investors have shown less interest in recent surveys. Only 36% of respondents in an Associated Press-CNBC poll, for example, said buying Twitter would be a good investment, while 47% opposed purchasing the shares. For Facebook, prior to its IPO, a similar poll found 51% in favor of investing and 31% opposed.

Only 19% had a favorable view of Twitter vs. 47% who had positive feelings for Facebook, the survey found.

For most IPOs, few individual investors are offered the chance to buy in at the actual IPO price. Instead, they typically buy only after a new stock starts trading -- often at a much higher price. But more individuals usually get in on huge deals like Facebook, Google or, potentially, Twitter.

Facebook flopped

Facebook went public on May 17, 2012, pricing its shares at $38 each. But, after a short-lived trading bump of a few dollars, the price quickly started dropping, reaching a low of under $19 in November. Many IPO investors gave up and sold, taking a loss. It took more than a year for the price to climb back to $38, and it is up to almost $49 now.

Interest in Facebook’s IPO was so high that the company and its underwriters didn’t just raise the projected share price. Three days before pricing, they also upped the number of shares to be sold by 25%, sopping up huge amounts of buying demand that might have supported the shares in subsequent weeks.

To be fair, Facebook not only was one of the most famous Internet brands of all time, it had also reported revenue of $3.7 billion and net income of $1 billion in the year before it went public. Twitter had revenue of only $317 million last year and a net loss of $79 million.

Facebook’s share price also suffered from technical trading glitches on the Nasdaq and a last-minute revenue warning from an analyst at lead underwriter Morgan Stanley. Twitter has tried to carve out a different path, going with the New York Stock Exchange and Goldman Sachs instead of Nasdaq and Morgan, for example. And selling less than $2 billion of stock should be much easier than selling $16 billion as Facebook did.

Big investors are looking for a much gentler ride this time. Better planning leading up to the IPO will surely help. Then it’s up to Twitter to deliver strong results in its actual business.

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