I’m a big fan of Twitter Inc. (NYSE:TWTR). I use it all day. But there’s a big difference between liking a company (and its products and services) and its stock.
Twitter has become my “go to” source for news. If the market or a stock suddenly moves sharply, the first thing I do is check my Twitter feed and do a search for the particular ticker symbol.
When breaking news happens, like an earthquake or a major political event, Twitter usually has information first. Plus, you can get news from a wide variety of sources rather than just the major mainstream media outlets.
Keep in mind, Twitter is not a news service. It’s like a message board to which anyone can post pretty much anything they want. And there are some pretty stupid things that wind up on Twitter. But for breaking news, you often get people who are on the ground where the event is happening, tweeting about what is happening around them.
I also tweet observations about the market or individual stocks. Sometimes I’ll see a chart that’s especially interesting or a piece of news that will impact a stock or sector, and I’ll tweet a quick opinion on it. Feel free to follow me. My handle is @stocksnboxing. You can follow me by clicking here and then clicking on the blue Follow button. I moonlight as a ring announcer on weekends, so there is the occasional boxing tweet, but my main topic is the market.
Investment U also has its own Twitter handle. You can follow it by clicking here and clicking on the blue Follow button.
But as much as I use Twitter, I don’t want to be a shareholder when the stock begins trading today.
It’s Too Expensive
On Monday, Twitter raised its projected IPO price to $23-$25 per share, up from $17-$20, valuing the company at $17.4 billion.
In the first three quarters of the year, Twitter lost $133.8 million, nearly double the $70.7 million loss from a year ago. However, revenue has more than doubled in 2013, to $422.2 million.
Compare that to Facebook (NASDAQ:FB), which hauled in $4.85 billion in revenue. Granted, Facebook’s market cap is seven times larger than Twitter’s, but Facebook is profitable.
In fact, Facebook is projected to earn $1.90 per share in 2016, giving the stock a 2016 forward price-to-earnings ratio of 26, which is actually cheap when you consider that the company is expected to grow earnings by 32% per year over the next four years.
Twitter is not expected to earn any money until 2015 at the earliest. In 2016, Wall Street predicts Twitter will earn $0.31 per share, though that estimate may change when more analysts release earnings models after the IPO.
At $0.31 per share in earnings and assuming a $24 stock price (the middle of the expected IPO price range), the stock has a 2016 forward P/E of 77.
Its IPO valuation puts its price-to-sales ratio at 27 based on 2013′s projected numbers. That compares to a P/S of 16 for Facebook.
A Growth Stock?
But as Barron’s puts it, “potential investors are undaunted: Twitter’s appeal is its growth.”
I don’t deny that the company will grow revenue and profits over time.
But do you want to own a stock that may or may not earn a profit in a few years, with very little clarity on how much profit it will earn once it finally stops hemorrhaging money?
What concerns me about Twitter is that by the time it turns a profit (or maybe even before) some new thing might come along. It wasn’t that long ago that Rupert Murdoch bought MySpace for $580 million, selling it six years later for a paltry $35 million. The reason for its demise? Facebook.
Could something similar happen to Twitter? I don’t see why not. Twitter is a great tool to succinctly deliver a message. You can use only 140 characters in a tweet.
It seems like someone could replicate Twitter’s effectiveness, but perhaps allow 150 characters. Kind of like 7 Minute Abs instead of 8 Minute Abs.
Of course, I’m joking. I don’t think a 150-character copycat of Twitter will lead to its collapse, but I do think it’s possible the next social networking technology could impact its business in a negative way, like Facebook did to MySpace.
I would not be surprised if Twitter’s stock pops on the IPO. There is a large amount of buzz about it, and it appears the offering is being managed in a smarter way than Facebook’s.
Facebook sold lots of shares at the highest price possible. Facebook shares are now 29% higher than the IPO price, but shareholders were in the red for a while.
Twitter is selling only a small portion of the company and, though it raised the price recently, seems to be trying to handle it in a way so that investors don’t get hurt like they did in Facebook.
But Twitter is expensive, is in a business with little barrier to entry, has an unproven business model and is not expected to be profitable for at least another year.
There are plenty of stocks out there with better fundamentals. Twitter is a pure speculation at this point. You’re better off spending time on Twitter rather than owning it.
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