Why Twitter May Fail

Twitter IPO

Twitter offered its stock up in an IPO a month ago, but the verdict is still out on the long-term viability of the popular social media platform.  On Thursday, November 7, Twitter stock opened on the New York Stock Exchange (NYSE) at $45.10. The stock rose to just over $50, but closed at under $45. Anyone who bought early and held that stock lost money that day.

The microblogging service was debuted in 2006, and gained support quickly. By 2012 over 200 million users were registered on the site. The site handles hundreds of millions of Tweets per day, and over a billion and a half queries through its search tool.

After the less than spectacular rollout surrounding the initial public offering of Facebook, another social media juggernaut, there has been great skepticism, perhaps even cynicism, regarding social tech IPOs.

The fact that Twitter suffered a loss on its first day, despite typical stock IPOs closing above the initial offer price due to a market practice known as initial undervaluing, is viewed by many as a sign that the stock is overvalued. With a current valuation just a few points shy of $14 billion, this could be of serious concern to investors if the bubble bursts.

It has happened before, tech companies creating paper billionaires only to crash and burn, leaving investors as bewildered ex-billionaires holding worthless stocks and wondering where it all went wrong. Palm, producer of the once-popular Palm Pilot, Treo smartphone and other personal electronics, did its IPO in 2000, with an initial offer price of $38. The stock soared to $165, before closing at $95.

Within a year, swimming in an environment filled with innovative new technologies and shark-minded competitors, Palm stock was trading at less than $2. This is considered one of the worst financial fiascos produced by the dot-com bubble bursting.

Twitter’s financials, and its inability to monetize its business model, has some analysts looking at the past as prologue as far as the ubiquitous 140-character-limited communication service is concerned. Twitter posted losses in the neighborhood of $80 million in 2012, and is on course to double that loss in 2013, already posting nearly $140 million in losses by September.

Other online companies that have become multi-billion dollar brands, such as Microsoft and Apple, were profitable businesses when they did their IPOs. This is not to say that it is impossible for Twitter to defy critics, and economic history, and turn around into a highly profitable enterprise. Amazon was losing several million dollars a year prior to going public, and they are currently the most successful online retailer in the world.

The company is making changes since its IPO. It is debuting retarget ads, predicated on the use of browser cookies, allowing it to cross-pollinate advertisements across platforms, based on web activity. Twitter has also hired its first female board member, Marjorie Scardino. Scardino’s hire comes in the wake of attacks on the company for lacking diversity.

Twitter has a large and loyal user base, has excellent market penetration and a proven technical platform. That said, Twitter also has a shaky and unproven business model and financials that are given many investors pause. Some people are projecting that Twitter will continue to lose money through 2015. The question is, will investors stick it out with them until profitability comes around? Only the oracle of the market knows for sure, but risk-adverse investors are sitting on the sidelines until the smoke clears.

By Mark Clarke


Business Week


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