Is Twitter Safe to Buy After the IPO Lock-Up?

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On Tuesday, May 6, a huge block of the outstanding common stock of Twitter Inc. (NYSE: TWTR) exits the 180-day lock-up period following the company’s initial public offering (IPO) in November. Since the IPO, the company’s stock has dropped 13%, after rising as much 188%.

The first block of stock to exit the lock-up period totaled about 9.87 million shares and were released on February 19, but they had little impact on the share price. Those shares did not belong to the company’s executives and represented a small portion of the nearly 570 million shares outstanding at the end of December. It is those 560 million-odd shares that will be available to sell Tuesday.

Twitter’s shares lost about 10% last week after the company revealed a slower-than-expected growth in subscribers. Even so, its market cap remains around $22 billion and it is worth about 17.5 times expected 2014 sales and nearly 11 times 2015 sales. On expected earnings, Twitter trades at more than 1,000 times expected 2014 earnings — and a “mere” 175 times expected 2015 earnings per share.

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It is possible that the new shares will hit the market en masse, but not likely. The impact would be only to drag the shares lower, especially following the poor reaction to the company’s first-quarter results.

One bit of good news is that CEO Dick Costolo told CNBC that the company has no current plans for a secondary offering because most of the big shareholders do not need the cash immediately. Once they do, however, there are about 387 million more shares that could be registered for sale by selling stockholders, and the company has already filed to register 214.5 million shares to use in its equity compensation program.

Twitter stock may be a safe buy for a while, but unless the company can crank up its subscriber numbers, all those shares lurking in the background are an albatross that the company does not need.

Shares traded up 0.8% in the noon hour on Monday, at $39.29 in a post-IPO range of $37.24 to $74.73.

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