Greenberg: Why a Shellacking Would be Good for Twitter's Stock

SAN DIEGO ( TheStreet) - In a Real Money piece yesterday Jim Cramer argues that, in Twitter's ( TWTR) initial public offering, there were more investors than flippers. (He took a swipe at Barry Diller, who earlier this week said just the opposite.)

Cramer writes, "I fear most that Twitter shares will get hammered again, and that you will proceed to sell."

To which I say: A good shellacking would be a good thing for Twitter -- because, as Facebook ( FB) has shown, such a move would reset the stock clock to real-world time.

Real-world time takes out all of the fluff and lets the company go about its business without any heavy focus on the stock.

The worst thing for a hot new issue is for it to reflect anything short of perfection, because then it risks the public humiliation of a stock-market spanking -- and an even-worse risk of getting viewed as damaged goods. (Good thing for Potbelly ( PBPB) that its numbers didn't disappoint Tuesday night -- it got just the opposite reaction. Still, the stock's big leap today sets the stage for something worse if the company misses next time.)

For Twitter, the balloon has been deflated slowly, but the shares still remain in the ether, with a market value ahead of Netflix ( NFLX) and Tesla ( TSLA) and price-to-sales ratio well ahead of Facebook and Amazon ( AMZN).

You can obviously slice this thing any way you like -- and, in the end, if and when Twitter is viewed as having missed, it will be missing whatever metrics Wall Street wants to use to validate its valuation.

What's clear is that analysts who are rolling out coverage post-IPO are hedging their bets: All four of them have come out with non-Buys. That compares with Buy ratings for most of the pre-IPO crowd.

My favorite is Robert Baird's Colin Sebastian, whose target is $48, well above Twitter's current price. In my book, if your target is above the current price your rating should be a Buy -- not Neutral.

But I get it: Like all of the others, Sebastian is saying the stock is likely to go lower before it goes higher. That's because they know chances of a misstep, or the perception of a misstep, are high.

Without question, Twitter is a great disrupter of the industry I've spent my career in. But how that translates into a business, especially with a need to draw advertisers, remains to be seen.

In the meantime, if you really want to know what can go wrong -- and you should always want to know that if you're an investor -- get a hold of as many analyst reports as you can. Then do what I do: Scroll to the very end. That's where they usually list the risks to their investment theses.

As I learned back in the glory days of the Internet bubble, when arguing the merits of an investment theory seemed foolhardy, those risks often proved to be prophetic. I have no idea which risk factor will be most important for Twitter, but the one that has grabbed my attention the most is also the most obvious. It constituted the last two to be listed among the risks at the tail end of Susquehanna analyst Brian Nowak's impressive 50-page report: "Low profitability and the continued need to spend to drive growth."

Yes, even Twitter eventually has to make money.

Of course, I said the same about Amazon and Netflix.

Too early to say where Twitter will fall in that mix.

(Originally published on Real Money)

-- Written by Herb Greenberg

Herb Greenberg, editor of Herb Greenberg's Reality Check, is a contributor to CNBC. He does not own shares, short or trade shares in an individual corporate security.

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