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About Me

Darren Winters is a self made investment multi-millionaire and successful entrepreneur. Amongst
his many businesses he owns the number 1 investment training company in the UK and Europe.
This company provides training courses in stock market, forex and property investing and since
the year 2000 has successfully trained over 250,000 people.

Sunday, 11 May 2014

Twitter Underwhelms The Markets

Twitter, the social media company that was founded in San Fransisco in 2006, came to the market with a successful Initial Public Offering in 2013.

On November 6 of that year, 70 million shares were issued by Goldman Sachs at $26 per share. On November 7 they began trading on the NYSE and closed the day just under $45. Which valued Twitter at about $31 billion. All shares issued gave the company a market capitalization of $24 billion.The shares rose to a high of just under $73 on Xmas Eve, but since then they've been in something of a downtrend, and on May 6 they took a significant dive from an opening price of $37 to finish at just under $32. They fell even further the following day to around $29.50, but managed to rebound on May 8 to around $32.

The financial media made much of Twitter's 'combustion' as it coincided with the expiration of a company 'lockup', which meant company employees could now offload shares should they wish to. And it looks as though some of them took the option.The Twitter share price dip appeared to have a knock on effect on other technology companies. Facebook, which has been trading sideways on the daily charts since late March, had a similar dip on the day, just not so drastically. It went from an open of $61 to a close of $58, (it was lower on April 28 though, at $54.66). And LinkedIn followed a similar course, though it's been on a clear downtrend from March onwards. Google is another firm whose share price has dropped from a high of $610 in March, to $520 on May 6. Yahoo doesn't look any better either.

Why the fuss about Twitter's losses? It was clear that the company was in a downtrend anyway, and anyone who knew about the lockup expiration date would have seen the May 6 dip coming.Twitter's first quarter earnings this year were better than expected, coming in at $250 million. Disappointment came in the form of lower user numbers than anticipated, which only grew to 255 million from the previous quarter's figure of 241 million. This slowdown, which feeds the worries about Twitter's ability to grow user wise to Facebook proportions, has had a clear impact on the share price.

There's also concern that Twitter's falling advertising rates will impact earnings, but Twitter counters this by pointing out that greater volumes will naturally lead to lower pricing, and that advertising revenue is increasing anyway. For a company that makes 90% of its money through advertising, this is an crucial area to get right. By comparison, Facebook's first quarter results look very strong, with revenue up $2.5 billion. Of this, $2.27 billion is in advertising revenue, which is a 82% increase on the same quarter last year. Facebook now has 1.28 billion active users. Considering that Twitter and Facebook were founded just two years apart, (Facebook first in 2004), and the Facebook IPO only preceded Twitter's by a year, there is a noticeable difference in both revenues and users.

Perhaps the emphasis Facebook puts on bringing 'friends' together has contributed to building a larger user population, there is certainly more functionality and features on offer.  Twitter on the other hand is simpler - sending out information to the world in bursts of 140 characters. If you categorize Twitter as a simple micro-blogging platform as opposed to a true social network, could that difference impose limitations on its growth prospects? 

It would seem that Twitter is symptomatic of a general downturn in technology stocks. Perhaps the question we should be asking is why is the technology sector not performing as well as it was? Even with a good first quarter, Facebook has seen no significant upswing in its share price. It's been trading between $54 and $64 for the past couple of months. When the investing world went crazy in the dot com boom of the late 90's, and piled into companies that had no revenue generating capabilities, the business model was just about getting as many people signed up to your platform as possible. Growth would result from a dominant market share. Companies raised huge amounts on their IPOs without ever having made a profit. There was a lot of euphoria around the opportunities online business appeared to present, which in many cases blinded investors to the reality of how few of these dot com businesses would actually ever make money. To a certain extent this model is still playing out (Amazon is still not in profit), but investors have recovered from their dot com hangover and now look at prospective social media companies, and tech companies generally, with a more jaundiced eye.
All that said, there is still enthusiasm for the launches of companies like Twitter and Facebook (though Facebook's IPO wasn't managed too well), and that enthusiasm tends to drive the initial share price upwards. What we may be seeing now in the social media sector is simply a correction.  Investors are still willing to put money into a company that they know will be unprofitable, perhaps for years, but they're doing it now with a sober perspective. If the company is investing in products, partnerships and services that will drive long term growth, then investors will be tolerant.

So how does Twitter make money?  At the moment it's predominantly through advertising, using promoted tweets and accounts to reach target audiences.  It also sells data for analytical purposes to interested companies. So what might work in future to increase profitability? Maybe the company could consider charging for the service. Not so popular for individuals, but for businesses it could be a viable option. I guess the question is: - where is the ceiling on revenues for a free service that survives on advertising revenues? The only way to improve using advertising alone would be to drive up the prospective target market - i.e. attract more users. Is Twitter's platform versatile enough to do that in the long run? Let's see what the first quarter's results tell us next year.


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