Twitter’s IPO: a financial perspective on our emergent social-media world

twitterFor the past several decades, the stock market and the financial world seem to be increasingly abstracted from “the real world.” The epic housing bubble and economic downfall of the 2000’s are just a few obvious manifestations of this phenomenon. My rough understanding of how any valuation should work is based on my experience of everyday consumerism, paying for basic products whose cost is based roughly on the cost of production and a bit of added expense for the psychological value of an object based on brand and commercial image.

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 relates to our understanding or lack thereof about the “value” of social media.

I first became curious when I read that Twitter stock prices had jumped up 73% from their initial offer price the night before. This seems to be an absurd inflation of price in an incredibly short period of time. A certain amount of inflation based on hype and a flurry of consumer interest makes sense, but 73% seems a little…out of control. Upon further research, it seems that this kind of inflation is not totally unheard of, but it’s scale does reflect a time of extreme absurdity generally:

“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?

To understand this, I think we have to ask the deceptively simple-sounding question: what is the “real” value of Twitter anyway?

As best I can understand, the major “value” of Twitter lies in the following:

  1. The value of their user base; 200M active users (compared to Facebook’s 1.15 billion users).

  2. The 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.

  3. Twitter is theoretically an innovative software platform with long-term value.

  4. The brand. Twitter as a brand has become a kind of social institution, perhaps independent of the actual technology/platform behind the brand.

AND YET-

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 and sales of user data 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, even symbolic value of a company, rather than a concrete and reliable factor in the long-term bedrock of a valuation.

What can be the long-term value of any simple social media platform, such as a Vine, a Snapchat, even an Instagram or Twitter? Companies like Google or Apple have more concrete products that can be measured and relied upon in the long term– Apple’s truly valuable software and hardware combined with the power of a massive commercial brand, or Google’s innovative and massively complex software combined with a deeply ingrained presence in the very use of the Internet. But for Twitter- whose wild success is arguably based on the complete simplicity of the interface and its constantly changing, updating, “hype machine” capabilities- I would argue that the real, long-term value in the product itself is very much up in the air.

To return to 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 evidenced by the way insurance companies coldly calculate the value of a human life. There seems to be a deep perversion in this system wherein private companies like Twitter can capture the romantic imagination (and, of course, the massive investments) of financial institutions, but human life is valued with crisp realism and efficiency.

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45 responses to “Twitter’s IPO: a financial perspective on our emergent social-media world

  1. Reblogged this on My Korean Language Journey and commented:
    This post has some very interesting points.

  2. Twitter is one of those things that I’ll never understand, lol.

  3. Another bubble is building in the form of a “Social Networking”. Twitter’s valuation makes no sense at all. This would follow a parabolic path just like Tesla motors.

  4. seweverythingblog

    Thoughtful and interesting post. Being hugely innovative, I’m sure Twitter will find a way to make larger profits and not alienate their user base.
    I’ve been tweeting for only a couple of years, and am obsessed with Twitter (and at my age, too. What am I thinking…). More power to them. Congrats on being Freshly Pressed!

  5. Thanks for the thought provoking post. I agree with you; Twitter’s valuation has much more to do with the potential for a Google/Facebook like future than its current fundamentals. And we tend to constantly over estimate the odds that a young firm will become the next Google or Apple.

    I especially liked your last point about valuing social media companies the way insurance companies do. I assume you mean that the more we “live our lives online” the more we should frame our valuation of these social media firms in terms of the value and volume of their user base (let me know if I’m wrong). So for Twitter, stop attributing so much value to future innovations and services (because these are very hard to consistently achieve) and focus more on the number and engagement levels of their current users (how much is a Twitter user actually worth?).

  6. forgot one major point difference!-Twitter is so fast and confusing…!!☆☆☆

  7. Yes, this psychological investor phenomena when Twitter has barely turned a profit prior to its IPO, is puzzling to lots. People want a quick drug hit-high, sell and get out quickly? My theory…

  8. Don’t forget, the bubble at the start is those who buy in the hope that the price will shoot up, and then sell almost immediately at a profit. This the drop in share price shortly afterwards and the rise in smiling faces of those who got in at the start, and left soon afterwards with a large pay packet.

  9. The analysis of Twitter IPOs is interestingly valuable,and I wonder how the future performance of the social media would look like when it data is subjected to an econometric evaluation.

  10. justmadstuff

    That makes so much sense. It seemed really absurd to me, too.

  11. me too. it’s really very hard to understand

  12. Reblogged this on Collecting Judgment in California | Yourself & Professionally and commented:
    I feel as if twitter is like that friend of yours that seems to know everyone and how they all know each other. When it comes to twitters influence on the online and business worlds it can be considered essential and irrelevant in the same step; but as it stands right now the demand is high and perception of the platform is well maintained but at the end of the day its where the users are most engaged and twitter as done a great job at capturing its audience’s attention, such as the “click and hold” action perfected by http://www.snapchat.com/.

  13. mrmrsimran

    You have a great point there. I couldn’t agree more with you. I should start pay attention to my twitter account ^_^

  14. Pingback: Twitter’s IPO: a financial perspective on our emergent social-media world | FINANZ

  15. Most of this is investors chasing the dream. Everyone that missed out on the dot-com boom will jump at the next opportunity, which are the Facebooks, the Twitters, the Snap-chats, etc. It is the potential to make a ton of money that drives these investors to make wild bets. The best case for wild bets on tech is Amazon, whose share price is around 1300x its earnings. Buying a share today at the current price implies a lot of faith that Amazon will continue to grow. It’s interesting to note that Buffett and other value-based investors would not speculate on these kinds of stocks. I for one, would not buy this one.

  16. Love the idea of the price of innovation. The innovation of twitters instant communication between like minded people is creating change in society every day. How do we put a price of the power to change the world?

  17. You’re wrong. It’s different this time :-)

  18. I would agree with the author about Twitter potential to be a powerhouse. My only reservation is how to effectively turn all it’s users to potential stream of revenues without relying solely on advertising.

  19. Reblogged this on Prodigy Income Generating Site and commented:
    Thank you for this informative post!

  20. Pingback: Twitter’s IPO: a financial perspective on our emergent social-media world | frambelli50165

  21. Pingback: Twitter’s IPO: a financial perspective on our emergent social-media world | Lancashire Network

  22. Anchoring value in the idea that price is a function of materials, labor, and a little for profit is a long-gone idea in commerce. Starbucks mixes some water, sugar, a little milk, and a few coffee beans together and charges $5 for a cup of the glop. Price, in Wal Mart or on Wall St., reflects what people will pay. Starbucks could cut the price of a cup of sugary glop in half and still make a tidy profit. Twitter’s price sky-rocketed because the investment bank doing the IPO carefully managed the number of shares being offered and pitted that against incoming demand, making sure that demand way outweighed the carefully managed supply of shares. There was an artificially created shortage. It had little to do with the real value of Twitter’s services, just as the price of a Starbucks’ coffee does not reflect the price of the ingredients.

  23. I never pictured this cute little bird chirping obscenities until now.

  24. Interesting topic! I believe it will not be long before the true value of companies like twitter is identified.The question is… what will be their contribution/value? For instance, will they just be a social arena or will their existence provide a meaningful gap within our society and more importantly our youth, regarding social responsibility accountability, justice and/or opportunity.

  25. leftofthebuttonwood

    Cost plus some random, acceptable margin is not how valuations are determined. Among many other factors, it is essentially what an investor is willing to pay today for future earnings. The IPO underestimated the perceived public valuation of Twitter, ‘leaving money on the table’ for Twitter itself. Today’s valuation is simply where buyers are meeting sellers on the open market. Yes, there are certainly psychological factors involved for THAT method of pricing 😃

  26. Reblogged this on natescienceland and commented:
    my first,

  27. Reblogged this on We are Anonymous and commented:
    Great Post. Very Beautifull ! !

  28. Please excuse me, I had to edit.. I was trying to type from my phone..

  29. Nice post. You reminded me of a couple of concerns I had about the stock market and its reliability/validity as a “sound” investment tool for the average-size accounted investor. When valuation is gauged in regard to company earnings potential, how much of that is offset by volume of share purchases or sales in any given segment of time? Will there ever be fair practice in terms of per investor accountability and transparency because the thought or possibility that the wealthy or large groups of wealthy investors could trigger or spur such increases of the referenced 73% would be almost as poor or disheartening as the record or use of a specific increase of “73%” as noted in various other statistics and data concerning other information(disrespectful), simply because that increase could’ve been a decline and affected a misinformed or unprepared investor(s). Reminiscent of 2008. I say that with the consideration or thought in mind, also, that so much of the economy and the domestic economy + humanity at large is struggling en masse, unnecessarily or for some unknown reason seemingly, simply by choice. We live in a modern world that has leaders and the affluent, unwilling or too unintelligent, maybe indolent to create and change to appropriate changes and updates that match with a more modern or updated society, infrastructure and business practices- heck, even media and content is outdated! (I can remember in 2004-05 thinking that I was tired of the recycled garbage and content in film and tv, the sequels didn’t bother me as much as the current lack of intelligence, creativity, advancements, originality, education etc. found today; I mean come on already, it’s like these billionaires can’t cover up anymore their focus on brainwashing and controlling the public’s psyche for more than consumerism). I sometimes wonder how much of these technology company’s assets and financials are contributing to this nation’s budget and accounted for in terms of GDP, even though technology is a non-tangible resource but is a very succinct form of business. I say that outside the fact that everyone knows the common practice of tech companies largely outsourcing and offshoring their nexuses and tax obligations. I think legal forms of investment are great tools to empower and create financial stability but when it’s abused and deliberately manipulated in tandem for certain groups of people that are irresponsible, it becomes a problem- e.g. 2008. I’d love to be able to invest in the stock market rather than peddle petty black market products and risk or damage my long-term safety, earnings potential or “record” but I currently don’t have enough to invest in ways that could produce viable yields. Of course there’s the orchestrated and should be outdated stereotypes and nonsense shenanigans, played out over the media and public television for that super low rate the cable company dishes, that I unfortunately have to dodge and weave through on a daily basis in this country. I’m not really a follower of others or the famous and I dam sure don’t care to think like them, even if everyone else is or does- that’s like admitting to allowing myself to be brainwashed or mentally controlled by these wealthy idiots and vultures that produce and “regulate” the bullsht in the first place.

    Twitter is cool, especially when they begin to develop and or allow me to create and generate ways for me to monetize simple functions for the users via its platform- before they steal that idea from me or prevent it because of their partnered interests of control and oppression. The next independent entrepreneur or artist that sends me a tweet, advertising or marketing their painting, service or whatever- it would be cool to click them .99 cents for their work and contribute. Doing so for your nice post would’ve been cool! I was bored AF and found something interesting. I’m just tired of all the $ bypassing those that need it and going back and forth to billion dollar companies (via marketing expenses and sales (duh, commission)) that skip the needs and their responsibilities to the very people that make their success possible. It’s like a drug dealer calling one of their customers a crackhead and then threatening them- complete ignorance. Everyone’s brain is getting high off something. No, it’s like wealthy people incarcerating poor people, labeling them criminals, black-listing them among society for the same things they do, just on a larger scale: e.g. Pharmaceuticals; Then lobbying to ensure there are no opportunities or other options. Elaborate stupidity that’s well orchestrated and in place, during a time that is intolerable and unsustainable for the country as a whole. What pisses me off(!): the good people that have nothing to do with the foolish sht, are affected. Not to mention these sick producers and wealthy work so hard to separate people from faith, water it down via cliches and denigrate truth with fabricated, misused jargon, propaganda and whatever nonsense and tactic: e.g. 73% increase (how many times will these people focus in on specific, coincidental statistics, like it’s cool or something? It’s not cool to me at all).

    I don’t want to ramble, most people wont care enough to create change anyway, it’s kind of like what I said earlier, people struggling economically unnecessarily- seemingly by choice. (Too cool for school type bullsht). My other real concern, not to speculate, what was the inspiration or who helped the founders come up with the idea of a tweet and twitter in the first place?

    Sorry bastards, I want a check.
    (& I’m not talking about next to my handle, corny little maggots)

    Anyway, thanks for letting me vent a little on your blog. Next time I hope I can give you 99 cents for it.

  30. Reblogged this on What's the Bizness? and commented:
    I may not know much about social media, but I’m fairly certain this is spot on!

  31. Warren Buffet’s advice holds true for the prudent investor. “Be fearful when others are greedy and greedy when others are fearful.”

    I followed that advice for one investment I made in the late1990s with a company that had a great product but got caught up in a scandal that later proved to be false.. I bought as the stocks slid to as low as $1.25 a share. Then I held on to the 3.000 shares I bought for about $10,000. I only wish I bought more shares at the low point.

    When the shares hit $45 a share a few years later, I sold. I should have hung on. Today those shares are selling at almost $68 a share.

    The Twitter sensation is the reaction of a greedy and ignorant mob and every bubble is starts out because greedy people run along with a herd of greedy cattle.

  32. The revenue drivers of these institutions are PPC and adverts. How come they are making a loss a year before their IPO. As an experienced investor, i always recommend tested and trusted companys shares to newbies to avoid been badly burned. Hope we learn something from the facebook over valuation last year.

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