Tweet This: Twitter's IPO Is Speculative

NEW YORK (TheStreet) --The big news of the week is the Twitter initial public offering this week. Its ticker symbol will be TWTR.

Twitter's IPO is similar to Facebook's (FB). There are questions about valuation, a lot of excitement about being able to own shares of an important social media company, and fear of the stock going up too high too soon or initially falling out of bed like Facebook's.

Unlike Facebook when it went public, Twitter is not yet profitable. As you will see, investors here will have to tread carefully in the first few days after the IPO, as they would for any speculative investment.

Earlier this week the estimated pricing of Twitter's IPO was raised from a range of $17 to $20 to $23 to $25 based on demand for the shares. It should not be a surprise if the deal is priced even higher than that.

The big driver here is Twitter's over 200 million users, and hope that it can grow into Facebook-like user numbers -- Facebook has one billion users. Also, Twitter is in the early stages of monetizing the business with promoted tweets. There are hopes and expectations Twitter will find additional sources of revenue.

Revenue estimates for 2014 are $1 billion, which would put the price to sales ratio at 13, in line with LinkedIn (LNKD) and Facebook.

Even though the price to sales is in line with other social media companies, it is still expensive. Generally speaking, the potential for growth that is greater than the broad market is going to be more expensive than the broad market.

Jim Cramer is worried the stock could open at $45 to $50 per share, which he feels is too expensive. Investors considering buying the stock should have their own line in the sand, a price they will not exceed for buying shares.

Sticking to a plan might be easier said than done if the IPO opens high and keeps going. This could trigger a greed response that is too great to resist. Although not disciplined investing, investors who cannot help themselves could consider putting in just 25% of their original target amount if the stock is trading higher than hoped.

If the stock ends up dropping, then there is still capital to commit; if the stock keeps going higher, then at least some exposure was gained.

Another way in is through one of at least three exchange-traded funds that are likely to add Twitter very quickly.

The Global X Social Media ETF (SOCL), First Trust IPOX 100 Index Fund (FPX) and Renaissance IPO ETF (IPO) can all add Twitter within the first two weeks of trading. Of the three funds, it is likely to have the largest weighting in SOCL. According to a company spokesman, Twitter is likely to be a top five holding in SOCL, which, if correct, would put its weighting between 6% and 10%.

Twitter has clearly changed many aspects of life for people who are already users of the service. People find out about news from Twitter, products and services are promoted on Twitter and people are able to interact with friends, professional athletes and other performers in ways they never could before. All of that will continue to attract new users.

The company's success or failure will boil down to its ability to monetize the potential growth and to remain relevant as technology and social media needs evolve.

It is very important for anyone thinking about buying shares to realize that an initial purchase in the first few days of trading is far more of a speculation than an investment.

Speculation is often treated as a dirty word but it is far less so when people realize that is what they are doing. Buying an IPO with no earnings per share on the first day of trading is speculating and will not be suitable for too many financial plans.

But for the person who realizes this and wants to throw a few dollars at it, go ahead. Just don't kid yourself and don't put in more than you can afford to lose.

At the time of publication the author had no position in any of the stocks mentioned.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

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