As the debate over the $40 billion market value of Twitter Inc rages endlessly on, the only thing you can say for sure about it, I think, is that it’s crazy. It’s either way too high, or way too low – and simply impossible to know which.
The stock opened on the New York Stock Exchange in November last year at $US26, peaked at $US74.73 on Boxing Day and closed this morning $US62.32.
Nobody has any idea what the business is worth, including the 29 stock analysts who are paid plenty to work it out and all the early investors who have put real money into it, and it’s unlikely that next week’s 2013 earnings statement is going to change that.
In the first half, revenue increased 107 per cent to $US253.6 million while the loss increased 41 per cent to $US69.3 million. There’s nothing like a juicy increase in the loss to underpin an internet float.
But this is 2013, not 1999. There’s been a tech crash and credit bust since then, which should have purged all silliness, for a while at least. But here we are going silly again, valuing a business that’s never made a profit at 70 times its sales revenue.
To justify its price using the normal market valuation ratio, Twitter would need to earn a profit of at least $US1.5 billion, which is roughly three times current sales revenue. Crazy.
Morgan Stanley’s analyst, Scott Devitt, among others, has issued a sell on the stock because he says it will be hard to transform itself from a free product for a niche audience to a genuine money-making business.
Then again it has more than 210 million users worldwide and has become the predominant social media utility. The barriers to entry on the internet are less tangible than in other natural monopolies such as telecommunications, where you have to build a network, or in railways, but they’re real nonetheless.
Twitter is becoming part of ordinary life. Politicians, including President Obama, use it to announce things; so do celebrities. Rupert Murdoch uses it to vent. It’s usually first with major news. And then, of course, there’s all that pointless babble.
A Californian research firm named Pear Analytics analysed 2000 tweets and concluded that 40 per cent was “pointless babble”, 38 per cent was “conversational” and the rest was self-promotion, pass along value and news.
Yesterday it emerged that one of the world’s most successful hedge funds, Lansdowne Partners, has bought a stake in Twitter, saying that it sees “immense opportunity” in the stock. Lansdowne’s analysts have been talking to advertisers and concluded that more revenue will come than the market expects.
Last week there was an unconfirmed report that it’s close to a deal with a payments firm called Stripe that would allow users to buy things on Twitter using their credit cards without leaving the site, suggesting that Twitter’s management is now getting serious about e-commerce.
On balance I think Lansdowne Partners is right: Twitter is going to be worth a lot of money eventually – really worth it, as opposed to hopefully worth it, as it is now.
In the meantime it stands as one of the receptacles for the optimism and hopes of the modern era.
This is, at heart, an era of communication - astonishing amounts of it. Clearly humans are driven by a deep urge to communicate with each other, and have never before had the means to do it as efficiently as they can now.
It’s hard to escape the feeling that this age of communication has a long way to run, and that sending out 140 characters will be one of its foundations.