Trading and Investing

Social Media IPO's: How to trade them?

Undoubtedly, one cannot under estimate the power of Social Media companies like Twitter and Facebook. With millions of active users and the way these platforms have gelled into our daily lives, we have to accept that the potential of reaching out to millions in a little amount of time has great revenue generating opportunities. But these are companies whose revenue models, future and overall environment almost noone is able to understand as these are unorthodox and relatively new segment of stocks totally different from the manufacturing/service sector ones. That is why, their IPO's are so much hyped, totally unpredictable and become some kind of a gamble. But as the street knows, there are trends everywhere in the market and so is there a trend here. Take the stock of facebook, linkedin, Zynga, Groupon, Amazon and Ebay, you will observe a very interesting thing in common in their IPO's!


The early sessions see a lot of volatility as investors are in a frenzy to get their hands on these. In some time, the stock prices fall by atleast 50%! Yes, in 6 months, all of the above mentioned stocks had lost 50% in value! Surprised? Wonder why? Well this is purely because only after the stock has undergone immense volatility do investors start thinking about the revenue model, the valuation and then the fear grips in and the stocks plummet! Have a look at the table below:
Plummets
As seen, in the first 6 months all of them had seen the 50% plummet from their original price. Same can be expected from Twitter.

Once the stock has lost value, many call it an end and then the stock starts carving out a bottom. Most of these are Double bottoms and Head and Shoulder patterns which can be identified easily. Have alook at few charts below:

FACEBOOK:
Facebook (Source: Yahoo Finance)

LINKEDIN:
LinkedIn (Source: Yahoo Finance)

GROUPON:
Groupon (Source: Yahoo Finance)

The above charts show the bottom formation and then later, these stocks went on become multi-baggers by giving enormous returns in the time to come. Ofcourse, there are exceptions everywhere and in this case it is Zynga, till now Zynga has been moving sideways without giving any meaningful upside and is nearly down 70% from it's peak.

So going by the trend, the best way to trade any website stock is probably to let the dust settle down initially and let it carve out a bottom. It requires patience and regular tracking and once the bottom is identified, investments in the stock can give great returns over a period of years.
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