What Does Twitter's Sizzling Stock Run Tell Us? Absolutely Nothingby
Twitter has been a public company now for one quarter, with an earnings report coming out after the close of markets today. Its stock price has seen a very early meteoric rise, from a $26 listing price to more than $70 in December. It’s now hovering in the high 60s.
What can such a big jump tell us about how its first full year will play out?
Looking at data from 2005 to 2013 for 800 U.S. IPOs (I looked at offerings of more than $100 million, priced at $5 or more, for companies with at least a full year of data), we can see that the stock performance of a newly listed public company during its first three months tells you basically zero about what happens in the future.
First, we look at the relationship between the stock return in the first quarter after an IPO vs. the second quarter. There’s no relationship at all: No matter how good (or bad) the stock did in its first quarter, the second quarter is almost impossible to predict. In the charts below, the first-quarter return is always along the horizontal axis. The future returns are on the vertical axis. The red trendlines are all horizontal: telling you that the first-quarter return has no predictive power into the future.
We see the same pattern when comparing the returns of the first quarter with the next three quarters (to get a full year’s return).
If we wanted to focus on just the biggest offerings, we can filter down to the top 100 IPOs ($450 million or more in offering size). The story is still the same: First-quarter returns tell us nothing about what will happen for the next three to nine months.
Knowing this, don’t get fooled if somebody tells you that Twitter’s “momentum” will mean something in the short term. This is a small win for the efficient markets hypothesis. It’s possible that everything great about Twitter’s first year has already happened. Jumping in now might be way too late for a quick gain.