Lately memories having been lighting the corners of my mind. Misty water coloured memories of the way we were. The way we were back in the Tech wreck of the early 2000s to be more specific. I was working for a big assed American investment house during those heady days. The “sudden and unpredictable” collapse of a number of high profile tech stocks caused me an administrative pain in the proverbial. Twitter’s recent IPO is triggering some serious flashbacks.
Given that blog fans are a social media savvy breed, you’re probably aware that Twitter floated on the New York Stock Exchange on 7th November. Sir Patrick Stewart rang the bell to open the day’s trading, symbolizing the importance of the moment. There’s something about PatStew which adds a certain gravitas to any event.
The stock was initially offered at US$26 per share. By the end of the first days trading it had rocketed to US$47. Investors who got in and out quickly should be feeling very satisfied with themselves. Much like Russell Brand feels every weekend I’d imagine. HONK! The price has continued to hover in the mid 40s giving the company a market value of close to US$25 billion.
As you would expect there was an orgy of self congratulation among those involved. The underwriters, including Goldman Sachs, Morgan Stanley and JPMorgan Chase & Co, pocketed a tidy US$60m. Two new billionaires (at least on paper) emerged from the ranks of the Twitter executive – Evan Williams and Jack Dorsey.
We should all be doing a happy dance about the triumph of the free market system and lauding the great tech revival – right? As someone who has worked in stock market research, I’m horrified. The Twitter show sends shivers down my spine and not in a pleasant way. I see a future of portfolio carnage with legions of fund managers having to endure modestly trimmed bonuses.
I like Twitter, perhaps more so than Facebook, but it has one small drawback. Its a minor thing yet I cant get past it. Call me anal if you will but in its six years of operation Twitter has never made a profit. In fact it has accumulated losses of over $300m in the past three years. Ouch! Worse still it’s currently cash flow negative meaning that, like a shopaholic teenager, it burns through more cash than it earns.
I compare Twitter to a mining company which is sitting on a vast reservoir of gold but hasn’t yet worked out how to extract it. The gold is the 100 million people visiting the site each day and the data contained within the 5700 tweets per second. (http://socialmediatoday.com/irfan-ahmad/1854311/twitter-statistics-IPO-infographic).
At present 85% of Twitter’s revenue comes from advertising whereby businesses or individuals pay to promote a Tweet, a whole account or a trend. There’s also a system where advertisers bid to have their content appear in a particular space. The advertising can be very finely targeted. For example its very common for people to sit in front of the TV making amusing Tweets about the programs they are watching. Therefore Twitter is au fait with our viewing habits and has developed a feature that lets TV advertisers target Tweeters who have just seen their commercials.
Twitter are all over the mobile revolution in a way that Facebook aren’t. Indeed Twitter have just acquired for a cool $350m a start up called MoPub. This is a new platform targeting people on their mobile devices based on the data Twitter has collected from its users desk top computers. It makes me wonder what’s next – wirelessly beaming us subliminal messages while we sleep? They will undoubtedly know when we are asleep.
A further 15% of Twitters revenue comes from data licensing where the company flogs its public data aka “the firehose” to Data miners who try and make sense of it. They use algorithms to sift through mountains of tweets in order to get a grip on what’s hawt and what’s nawt. Of course the information will be used to flog us more shite.
The absurd valuation is based on the hope that Twitter will manage to turn its’ buried gold into profits by Christmas time. Admittedly the top line growth is as seductive a glass of champagne a plate of oysters and Barry White playing in the back ground. Please try not to get too aroused by this.
That’s some seriously sexy revenue expansion. Whoa. I get tingles gazing at these blue bars. Sadly I know from bitter experience that this type of growth in unsustainable. Its hard to see how Twitter can keep up the pace when its user base isn’t expanding rapidly. Its also difficult to envision a sudden leap into profitability when company continues to spend bucket loads of cash on “research and development”. I predict that profits will come but not within the time frame the market is hoping for. In short Twitter will bomb and money will be lost. Like some of my past dating relationships irrational exuberance will give way to disappointment.
So what’s with the absurd share price? Company valuation is more art than science and art is often complete bull shite. You’d think the GFC would have made Wall Street a little more circumspect but it appears that people are swallowing hyperbole yet again.
Twitter its up to you to prove me wrong. Meanwhile there are rumors that Pinterest is about to float. Please God let it be false.
Got any hot tips?