Twitter, Transformation And Tech Valuation
Twitter Inc (NYSE:TWTR) is the darling of Wall Street this week. The company’s initial public offering managed to go off without a hitch. The firm’s future is far from secure, and those that bought in are expecting substantial growth, but Twitter has arrived and it looks solid. Twitter, we’ve been told, can transform the world. Is that a reason to value it at such a high level?
Twitter’s valuation at first sale has been widely discussed. The IPO was the most expensive, in terms of Price/Sales ratio, since some time in the 1970s. The question is what type of expectations are priced into the company’s shares, and which of those are likely to fall apart in the years to come.
Twitter Inc (NYSE:TWTR) is, at least for the moment, a much more niche company than Facebook Inc (NASDAQ:FB). The major uses for the service are as a messaging tool, a way to keep track of celebrity gossip, a way to get up to the minute news, and a way to discuss events as they occur.
A lot of the conversation about Twitter Inc (NYSE:TWTR) has skirted these more obviously commercial uses and concentrated on things that do not add much value to the company. Twitter was, according to the social media obsessed traditional media, a major impetus behind the Arab Spring. It has been instrumental in keeping people safe in the midst of disasters. These add to the brand value of the company, but advertising to Syrian rebels is not a big earner.
Twitter’s transformative social powers, if they exist, are not obviously usable as revenue earners. Its commercial powers have not even shown themselves able to earn money. The question for retail investors is how much of the narrative around Twitter Inc (NYSE:TWTR) social value has pumped up the company’s valuation.
Twitter Inc (NYSE:TWTR) seems dedicated to making money off of advertising. It’s following the path of Facebook Inc (NASDAQ:FB) and Google Inc (NASDAQ:GOOG), but, more importantly, it is competing with them directly. Twitter has advantages those two do not, but its earnings power is directly related to how those company’s perform.
Many of the companies that have sold to the public in “hot” IPOs have been labelled as “transformational.” Twitter Inc (NYSE:TWTR) has certainly changed the way many people disseminate and process information; it may have contributed to social movements across the world; it may have saved people from disaster, but none of those factors make it more valuable directly.
Twitter is valued on a few key factors: user numbers; management competence; ad costs; ad load; and brand recognition. Only one of those is really altered by the company’s “transformational” qualities. Retail investors need to be able to divide the narrative from the fundamentals. Transformation and valuation are not the same thing. Twitter is not worth as much to investors as it is to journalists trying to spin a story.
Disclosure: Author represents that he has no position in any stocks mentioned in this article at the time this article was submitted.