On Tuesday, Twitter's (NYSE:TWTR)  IPO lockup expired, sending shares down 8% to $35.50. Is this an opportunity for investors to step in, or should shareholders sell before the decline worsens? Holders of Facebook (NASDAQ:FB) have done well by standing pat, but not everybody is as fortunate. Shareholders of FireEye (NASDAQ:FEYE) for example, are under water, as the stock price is now below its first day's close.

IPO holders are still profitable
Twitter went public in early November at an IPO price of $26, and closed the first day of trading at $44.90. This indicates a successful offering, and professional investors who received shares at the offering would still be in a position to book a profit at today's levels.

Twitter's lockup was huge by most standards, with nearly 500 million shares from insiders becoming eligible for sale for the first time. That's nearly 150% of the float, according to Yahoo! Finance.

Insiders aren't necessarily selling
However, this doesn't mean that insiders will definitely be selling. In fact, Twitter co-founders Jack Dorsey and Evan Williams, along with Richard Costolo, the chief executive officer, have no current plans to sell their shares. The company took the additional step of filing an 8-K to soothe shareholder concerns.

Perhaps knowing insiders were keeping skin in the game helped. Over the last few weeks, professional investors from Benchmark Capital, Rizvi Traverse Management, Kleiner Perkins, and others have stepped up to the plate and volunteered that they would not be selling as well. This seems to be a substantial vote of confidence for a company that has not produced profits, yet. In the most recent quarter, GAAP earnings were a loss of $0.23, and even non-GAAP earnings, which back out expenses from stock option compensation and acquisitions, were $0.00. This lack of earnings makes it difficult to find a widely accepted valuation floor.

Are concerns overblown, though? At its peak on Dec. 26, in what could be viewed as a late holiday present for investors who didn't immediately flip, the stock traded as high as $74.73. After a 53% fall in share price, its possible that investors who believe in the long-term value of the company are unwilling to accept a price dramatically lower from what they could have received just five months ago.

Other IPOs faced similar turmoil
This is a similar dilemma to the one that confronted Facebook investors last year. After an immediate fall from concern that it would not be able to monetize mobile traffic, the company announced that Mark Zuckerberg had not adopted a Rule 10b5-1 Plan, and filed an 8-K stating, "he has no intention to conduct any sale transactions in our securities for at least 12 months." This helped stem the flow of sales, but what actually turned the stock around was results.

Shareholders of FireEye were not as lucky. FireEye went public in September at a price of $20 per share, but closed up over 100% at more than $42 on its first day of trading. Shareholders saw prices more than double in the coming months, as shares peaked at $97.35 in March, only to fall hard earlier this week, closing near $41. FireEye will report earnings this week, which may provide better insight.

It all boils down to earnings
This volatility is caused by a new (and large) supply of stock coming to the market. Oversupply is causing the stock to find a new level, but as long-term investors, you need to remain focused on the fundamentals. If supply is met with demand from investors who see a profitable future, the price can change quickly. In the long term, all stock prices revert to a multiple of cash earnings.

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David Eller has no position in any stocks mentioned. The Motley Fool recommends Facebook and Twitter. The Motley Fool owns shares of Facebook. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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