Twitter’s IPO Priced at $26 a Share

So the most awaited IPO of this year Twitter Inc. priced its shares at $26 apiece for an initial public offering that will be the BTXtODVCQAALUawbiggest U.S. technology IPO since Facebook Inc.‘s debut last year. The short-messaging service priced shares a dollar higher the range it set earlier this week, giving the company a market capitalization of $14.4 billion.

Retail investors, including customers of some online brokerages and brokerages affiliated with the investment banks on the deal, were slated to receive less than 20% of the offering,. That total could change in the final pricing. Facebook placed a larger amount of its shares, 26%, through retail channels. TD Ameritrade Holding Corp. and Fidelity Investments both expected to receive Twitter shares from underwriters for some customers. 

Here is a thought that I shared from Prof Aswath Damodaran  the authority on corporate finance in this world, valued Twitter at about $10 billion. He made a ton of assumptions to get to that value and argued that changing those assumptions could give you a different value. In the last few days, he is sure that you have seen many stories about Twitter’s post-IPO worth, with numbers as high as $25 billion being offered as estimates. In fact, the gambling markets have already opened on the offering price and the players in that market seem to be siding with the higher numbers.

To describe the market the difference between Pricing Game versus The Value Game have some amazing stuff :The Pricing Game versus The Value Game  

The Pricing Game The Value Game
Underlying philosophy The price is the only real number that you can act on. No one knows what the value of an asset is and estimating it is of little use. Every asset has a fair or true value. You can estimate that value, albeit with error, and price has to converge on value (eventually).
To play the game You try to guess which direction the price will move in the next period(s) and trade ahead of the movement. To win the game, you have to be right more often than wrong about direction and to exit before the winds shift. You try to estimate the value of an asset, and if it is under(over) value, you buy (sell) the asset. To win the game, you have to be right about value (for the most part) and the market price has to move to that value
Key drivers Price is determined by demand & supply, which in turn are affected by mood and momentum. Value is determined by cash flows, growth and risk.
Information effect Incremental information (news, stories, rumors) that shifts the mood will move the price, even if it has no real consequences for long term value. Only information that alter cash flows, growth and risk in a material way can affect value.
Tools of the game 1.     Technical indicators 1.     Ratio analysis
2.     Price charts 2.     DCF valuation
3.     Multiples & Comparables 3.     Excess Return models
4.     Investor psychology
Time horizon Can be very short term (minutes) to mildly short term (weeks, months). Long term
Key skill Be able to gauge market mood/momentum shifts earlier than the rest of the market. Be able to “value” assets, given uncertainty.
Key personality traits 1.     Market amnesia 1.     Faith in “value”
2.     Quick acting 2.     Patience
3.     Gambling instincts 3.     Immunity from peer pressure
Biggest Danger(s) Momentum shifts can occur quickly, wiping out months of profits in a few hours. The price may not converge on value, even if your value is “right”.
Added bonus Capacity to move prices (with lots of money and lots of followers). Can provide the catalyst that can move price to value.
Most Delusional Player A trader who thinks he is trading based on value. value investor who thinks he can reason with markets.

If you play the pricing game, you are a trader, and if you play the value game, you are an investor. This is not a judgmental statement, because unlike some value investors, He don’t view traders as shallow as or somehow less critical to the functioning of markets than investors. After all, a trader who makes a million dollar profit can buy just as much with that money as an investor who makes the same profit. Ultimately, which avatar (price or value) best fits you will depend not only on your level of comfort with the tools (Are you better at reading charts or valuing companies?) but also on your personal traits.

In my experience, naturally impatient people who are easily swayed by peer pressure almost never succeed as value players and excessively cerebral folks who have to weigh everything in the balance, before they make decisions, are incapable of being traders.

Source : Musings on Markets


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