As the offering date for Twitter approached, the bankers could not seem to make up their minds on the pricing, with the offering price rising from $17-$20 barely two weeks ago to $23-$25 last week to $26 yesterday. The stock opened today, about an hour later than expected, at an eye-popping $45.10 a share, up 73 percent from the offering price. As you watch this process unfold, with a mix of wonder, greed and cynicism, the question that is begging for a response, is whether you should try to partake in this frenzy.
Assuming that you were not able to buy the shares at the offering price, should you buy now? And if you did get the shares at the offering price, is it time to cash out? The answer depends upon not only what you think about the company and its prospects but also on whether you view yourself as a trader or an investor, since it is not only possible but likely, in my view, that Twitter was both underpriced and over valued at its offering price.
In the pricing process, bankers gauge market mood and momentum, trying to determine the “right” price for the stock, not wanting to relive the Facebook fiasco, where the stock went into a tailspin after the offering, but also not trying to avoid the LinkedIn scenario, where the stock doubled on opening day.
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___Aswath Damodaran is the Kerschner Family Chair in Finance Education.