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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