For the past several decades, the stock market and the financial world seem to be increasingly abstracted from “the real world”, as evidenced particularly by the epic housing bubble and economic downfall of the 2000’s. My rough understanding of how any valuation should work is based on my everyday consumer experience of paying for consumer objects based approximately the cost of materials and construction, with a bit of wiggle room for the psychological value of an object based on brand and commercial image etc.
Obviously, the wild world of valuation on the stock market is a much different kind of enterprise. I was struck by this anew when considering Twitter’s IPO last week, and how this flurry of financial activity related to our understanding or lack thereof about the “value” of this social media company par excellence.
I first became curious when I received the notification that Twitter stock prices had jumped up 73% from their offer price the night before. This seems to be an absurd inflation of price for something in an incredibly short period of time. A certain amount of inflation based on hype and a flurry of consumer interest makes sense to me, but 73% seems a little…out of control. Upon further research, it seems that this kind of inflation is not unheard of, but it’s scale does reflect a time of extreme absurdity:
“These first day price pops were unusually high during the dot com bubble, when the typical pop was 65% of the offer price, well above the 7-15% range at other times. Twitter’s pop was 73%, reminiscent of the dot com mania days when investor psychology allowed companies yet to show a profit to trade at high prices on unrealistic hopes.” (From Forbes.com)
Which begs the question- in the year 2013, well after the dot-com bubble and well into a world where hot new tech companies have been hitting the market for decades- is it possible that investors can still have the same naiveté about Twitter that investors in the early 90’s might have had? Or is there something else going on here?
Which brings me to the essential question behind this whole phenomenon: what is the real value of Twitter?
As best I can understand, the major “value” of Twitter lies in the following:
The value of their user base; 200M active users (compared to Facebook’s 1.15 billion users) and
The parallel value of “mobile marketing” to this massive user base. Although Facebook has far and away a much larger user base, Twitter is in some ways much more strongly tied into the commercial world; it closely links the consumer with brands in a way that Facebook or other platforms do not (with the exception perhaps of a Pinterest).
Twitter is theoretically an innovative software platform with long-term value.
The brand. Twitter as a brand has become a kind of social institution, perhaps independent of the actual technology/platform behind the brand.
In concrete terms, Twitter has not yet had much success turning a profit on this user base. In 2012, they made $317M in sales, but overall reported a loss of $79.4M. And perhaps they simply have yet to push this commercial model as far as it can go- but it seems that there is an obvious chance of diminishing returns, wherein aggressive advertising may begin to drive away users.
If we suppose that they may find an innovative and non-invasive way to make a profit on their user base, then perhaps Twitter’s value is partly in their ability to innovate as a company and create new forms of commercial interaction. Yet “innovativeness” is more of a hypothetical value of a company, rather than a concrete and reliable in the long-term bedrock of valuation.
What can be the long-term value of nearly any simple social media platform, such as a Vine, a Snapchat, even an Instagram or Twitter? Even companies like Google or Apple have more concrete “products” that can be measured and relied upon in the long term- with Apple’s truly valuable software and hardware combined with the power of a massive commercial brand, or Google’s truly innovative software combined with a deeply ingrained presence in the very use of the Internet. But Twitter- whose wild success is arguably based on the complete simplicity of the interface and its constantly changing, updating, “hype machine” capabilities- the question of real, long-term value is very much up in the air.
To return to the notion of the naïve dot-com bubble investor, it seems that the “value” of these companies, at least for the moment, still relies primarily in a psychological force- the force of an idea of innovation and potential. This magic of the startup tech world is an idea that still seems to permeate our society. Perhaps we can understand this particularly well in the context of American society, where self-starting companies built on pure human innovation seem to truly embody the “American Dream”. Yet- we are also supposedly a society that values the individual. Be that as it may, our financial institutions do not seem dreamy-eyed or full of idealism when it comes to the dollars and cents of an individual, as strongly evidenced by the way insurance companies coldly calculate the value of a human life. When will the time will come for our financial institutions to begin valuing companies like Twitter, with all their social influence and human importance, in the same way they value a human life?