Should we short Twitter?

Folks: It has come to my attention that Twitter has gone public at a valuation of $18 billion. The company has modest revenue (about $600 million per year) and no profit. Is it a short?

What is the explanation for how this service can make enough profit ($1 billion per year?) to justify an $18 billion valuation? It doesn’t seem like a natural advertising medium. Given the possibility of distributing information for free via Facebook or Google+, Twitter does not seem to offer a unique capability to users.

Generally I am a believer in the efficient-market hypothesis but I can’t understand this one.

16 thoughts on “Should we short Twitter?

  1. If you believe in the efficient-market hypothesis, then you should also short Facebook. They’re running a P/E north of 100, and who’s left for them to sign up? Two quotes come to mind:

    “There are no markets anymore, just interventions.”
    —Chris Powell of GATA:

    “Markets can remain irrational a lot longer than you and I can remain solvent.”
    —John Maynard Keynes

  2. > Given the possibility of distributing information for free via Facebook or Google+, Twitter does not seem to offer a unique capability to users.

    You don’t use twitter, do you?

    Never short anything you don’t understsand.

  3. The market can remain irrational much longer than you can remain solvent. Believe it or not, Facebook is on an upward trend. Amazon remains almost unprofitable ever since launch and it’s valued at 163 billion dollar. Fundamental of a company doesn’t dictate its stock prices, wall street just likes to trade whatever’s hot. Efficient-market hypothesis and almost all economic theories cannot predict real world market.

    If you wish to bet against twitter on IPO, which actually is likely to be turbulent, considering how most tech IPOs are post tech bubble, consider buying put options, which will limit your downside, in case the market loves twitter irrationally, which is also a likely scenario.

  4. As an investor I couldn’t agree more. Twitter offers
    very little (right now) in the way of providing areas that
    offer income growth.
    As Warren Buffett is fond of saying: “The market short term is
    a voting machine but long term up is a weighing machine.”

    Wall Street, with it’s many absurdly valued companies, is a shark
    tank. Can you imagine walking up to an investor and asking
    him or her to buy your company for 100 times what your company
    makes in revenue? They’d say you were crazy. Yet it happens
    millions of times a day in NYC.

  5. “Given the possibility of distributing information for free via Facebook or Google+, Twitter does not seem to offer a unique capability to users.”

    You can distribute information for free on Twitter too. But both Facebook and Twitter (not sure about G+) also have ads to reach people who haven’t “liked” or “followed” your company or brand. Twitter is probably where Facebook was 3-4 years ago in terms of ramping up ad revenue.

  6. greg: It is true that I’m not a Twitter user, which is why I wrote the original posting. I need someone to explain to me why Twitter offers something unique to users that they can’t get from Google+ or Facebook. And also why Twitter is a place that advertisers need to be.

    Martin: Thanks for your explanation. Is that it with Twitter? Companies post commercial feeds for free and then buy ads that Twitter sticks in random consumers’ feeds? If I am Colgate and want to tell everyone on the planet about my new toothpaste, can I pay to have everyone who subscribes to Twitter receive a message about it? I can see how that would be valuable, though why haven’t they been able to capitalize on the value already?

  7. The underlying measure of a company is its utility to the marketplace environment it serves. By definition, Twitter is merely a piece of computer hardware. Serving as a db utility to all other internet server/db farms. Value is derived from its database(s), either as real time data, or archival/stored data.

    Twitter charges a fee for accessing its database. Therefore, in order to speculate on Twitter’s stock value, or with underlying derivatives. One should have a way in which to test Twitter’s db activity to project long term and short term revenue streams. All of which Twitter sells as part of its db information services.

    I disagree that TWTR value should be derived from a user base of 220M users when the platform does not require you to log in as a user to access its freely available search engine services. The kind of efficient-marketplace hypothesis I would subscribe to is to one that is machine based. A server farm where machines run other machines. Notwithstanding a bittorrent cause and effect of mobile device users inter-connecting in a real time environment of movement and motions.

  8. “If I am Colgate and want to tell everyone on the planet about my new toothpaste, can I pay to have everyone who subscribes to Twitter receive a message about it?”

    Yes, although like any online ad you will target it a bit better to increase ROI and piss off less people. And that seems to be the underlying reason why Twitter is still ramping up it’s ads, a desire to keep them tightly targeted and not piss off users with a feed full of ads.

    This “slowly, slowly” approach seems to be working, I see an ad a few times a day and they are mostly “on topic” for me, something I can’t say for Facebook.

    FB still insists on showing me ads for dating sites even though they know I’m married and it took them three and half years to switch from Australian ads to German ones even though I changed my address in there straight away.

  9. It’s a new paradigm, and all of the rules have changed. Applying old ideas of valuation to dynamic startups in this new economy fails to leverage the synergies we get from social media, e-business, and portals.

    In short, I expect my next employer to provide an Aeron.

  10. Approximately 50% of people btw 18-32 check twitter while watching TV. If a company wanted to target this market directly it would be easy while someone is watching TV, they flash a word/series of words preceded by a “#”. #doritos while watching a tv show where the main characters are eating could deliver a number of users, more importantly, you can probably see exactly who is looking at that by paying Twitter. That is likely part of the real value.

  11. @Martin Barry
    “FB still insists on showing me ads for dating sites even though they know I’m married”
    Uh-oh, maybe they already social engineered you 😉

  12. Only use I saw of twitter that looked remotely useful is to send twitter messages for traffic updates or mass transit service interruptions/updates. People can check the twitter feed on their smartphone if they are commuting home, and ignore it otherwise. Presumably, in Southern California, someone checking such info would be a good target for an ad for something like a Honda Natural Gas Vehicle which can use the HOV lanes with one person.

    Is it worth $24 Billion?

    In order to provide a 10% return per year for 20 years (~half of berkshire hathaway’s return since 1975 and 2/3 of Exxon Mobil’s), assuming a 6x price/sales ratio, twitter would need to generate $31B in revenue in 2033.

    With 49 million US users (source, assuming US users will grow by >2x to 120 Million and you can sell over 20 years NPV $100 worth of ads @ each user and also over 20 years, sell NPV $5 worth of demographic/usage info per user, per year, you would get $24B in revenue.

  13. @gerleim if they were Ashley Madison ads then perhaps you’d be onto something, but no. 🙂

    @philg at the current share price a short is looking a lot more tempting.

  14. I wouldn’t short it, like I wouldn’t short Tesla. It could turn into the same huge emotional, momentum loving stock, even if Tesla getting to “10% of global car sales” like some enthuse may prove more difficult and more expensive than people imagine. But I also wouldn’t buy twitter – one day it will stop loosing more and more money every year, and may even become profitable, even very profitable but why pay more than the valuation of 99.9% of S&P/Russell to wait for that day?

    Fundamentally there maybe lots of things Twitter could do to earn money like sending out Colgate ads etc, but “why haven’t they done that?” is simply premature – Before we all became Google/Gmail/youtube/google news and Google+ addicts Google didn’t play us video ads, send us ads in the mail, take up more and more screen space with ads, and seemingly going back on “No banner ads” promise (just kidding about G+, though I think it’s pretty good).

    Twitter is also not just for “the possibility of distributing information for free via Facebook or Google+” (I see you’re as overoptimistic about G+ popularity as I am) it’s like saying why would poetry (songs?) be popular when you can express any knowledge or emotion in a nice novel or a tome of encyclopedia. People love twitter and taht popularity is valuable – the social network data is valuable – you can track the propagation of news, the speed, datamine trends, track vectors of propagation (the connections are looser – “follow” instead of “friend” so there maybe less walls (private friend circles) for information to hit in twitter than elsewhere. They can sell this kind of data – Nielsen Ratings is buying it because it has more info on who watches what, when ( and everywhere – Netflix, itunes, tv).

  15. Market cap of Apple is $468B
    Market cap of Amazon is $160B
    Market cap of Verizon is $144B
    Market cap of Facebook is $116B
    Market cap of Boeing is $100B.
    Market cap of Starbucks is $61B
    Market cap of GM is $51B
    Market cap of Target is $41B
    Market cap of Twitter is $23B
    Market cap of Kroger is $22B
    Market cap of Western Union is $9B

    I wonder what the beta of these stocks are, or which of these companies will still be here in 10 years.

  16. This is one of those stocks that on the surface seems like a no-brainer to short. However, as stated several times above – emotions are governing the behavior of these types of stocks, not reason. Why would I want to risk my money either buying or shorting something like this when there are so many other rational places to put my money like high dividend paying businesses that have been around for years. Intel – paying a 3% dividend? Yes please.

    I don’t mean to undermine this discussion – but the question should really be … why bother shorting or buying Twitter…get your head right and move along.

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