On Monday, I announced a few changes to the stocks I follow and while I could not add Twitter to that list just yet since they do not trade and have not announced their ticker yet, that day is quickly coming. The company filed an S-1 and is rumored to be looking at a 2013 IPO, which would mean that I could end up having one more social stock in next year’s social stock picks.
I Truly Love Twitter
I’ve been using Twitter for a long time and while I always believed it would be useful, that feeling has gotten more and more powerful over the last few months. It has clearly become the top source of news out there. Yes, there are sometimes things that go wrong but no matter what the subject (news, sports, politics, etc), Twitter is usually the place where it all happens first. Yes, it’s only 140 characters, so a headline doesn’t tell the whole story. But in a world where speed is everything, being the first one with the news is critical.
I remember when I was on my way to Japan during the Tsunami and wondering what was really going on at Tokyo’s Narita airport, Twitter was by far the best source of information for me. These days, I use it to get news, follow friends and family, keep track of subjects that I like but also to communicate with big brands. It is now (with email) the top application that I use on my iPhone.
So yes, in a way, I’ve become a bigger fan of Twitter than Facebook (FB). That is the product, though. If that was the only criteria, I’d be preparing to buying a ton of Twitter shares.
It’s About The Business
Of course, as a Twitter user and believer, I tend to think the world of the company. The issue of course is that it’s not about how great of a product or how used it is. When deciding to buy a stock, it’s always about future earnings per share, which mostly depend on revenue growth. Yes, margins count as well, especially in the first few quarters where they will likely be under pressure as the company starts paying stock-based compensation and using some of that new capital. We don’t know much about Twitter’s financials, especially compared to what we knew about Facebook. That being said, revenues are said to be under $1B, which is not shocking. Facebook also had less than that in 2009 and look at how quickly those grew:
Can Twitter do the same or better? I personally don’t believe so. One of the big reasons why I’ve been a believer in Facebook has been my belief that it could do much more than advertising (which is still not really the case). I’m not as convinced regarding Twitter. Ads are the primary way to gain money. Another way would be the licensing of its data for various uses, but I can’t imagine that becoming a billion dollar business.
In terms of growth, I’ve always said that for Facebook it wasn’t about #users. Why? Because apps are being built. Other sites are building themselves or specific services on top of Facebook, etc. And clearly, for many reasons, I believed Facebook could grow revenues/user substantially. It’s not as clear for Twitter. They do have a few other services (such as Vine, which ironically lost significant appeal when Facebook owned Instagram launched a competing service) but those remain separate from Twitter. Yes, while some celebrities and brands are active on Twitter, it is likely to grow much bigger. But are we talking about 10x growth? I doubt it. I have read some other interesting arguments about Twitter being the ultimate advertising play but it’s not been enough to convince me.
In The End, It’s About Valuations
Like everything else in the market, it comes down to valuations, though I’m not sure what kind of P/E the stock will trade at, what growth it has been generating in the past year or so, etc. So it’s certainly very possible that the price could come down to something I feel is a bargain. Would I short Twitter? No. The company has the potential to change the world and while I personally don’t see as much revenues/profit growth potential, I know I could be wrong so I’d prefer not to play that game.
For me to invest in Twitter though, the P/E will likely need to be significantly lower than competing stocks such as Facebook.
What about you? Would you buy shares of Twitter?