The stock market never ceases to amaze me.
Shares of Twitter (TWTR) IPO'ed with much anticipation, something which I generally choose to avoid. For zealous anticipation generally leads to overvaluation.
So I did avoid Twitter, much to my brokerage accounts dismay. And I didn't really think about Twitter's valuation until today. Wow, $36 billion!
First, I am a Twitter user. I think it is a phenomenal social media platform. It is disruptive in that it allows users to disseminate information at breakneck speed, and much faster than traditional media platforms. Especially in what I will call "less information-efficient" markets. Generally speaking, I'm thinking of the many global news-worthy events where Twitter provides those on the ground an outlet to share information first-hand.
Twitter is also a powerful branding and marketing tool for individuals and businesses. Providing thoughtful and timely information to customers helps drive awareness and, hopefully, Twitter users' bottom lines.
But does Twitter have an impenetrable moat? From a technology perspective, probably not. I suspect a team of software engineers could build a similar platform in a weekend. From a "network effect" perspective, maybe. From a user experience perspective, Twitter is great (in my opinion). But I wouldn't pay anything to own a slice of Twitter. Especially when I can't figure out what Twitter looks like in 5 years, or when I can not accurately understand what competitors might instantly materialize out of a weekend code hacking session.
In the last 30 days, shares of Twitter appreciated 66% even after considering the 7%+ mid day pull back on Friday December 27, leaving shares priced north of $68. This, for a stock that was initially set to be priced between $17 to $20 a share for the initial public offering in November. Today, Mr. Market is selling fractional interests of Twitter for 4 times the bottom of that range!
Did the underwriter's really misprice Twitter's stock that badly? If so, insiders who cashed out are likely feeling a little vitriol towards the bankers.
On the other hand, the rapid ascent of Twitter's share price leads me to believe that no one has an accurate grasp of what Twitter is really worth. If no one really knows what Twitter is worth, buyers of Twitter stock are not investors, rather they are speculators.
Investing requires one to know the price ascribed by the market for the subject company and also develop an independent appraisal of what the subject company is worth. For the Twitter price tag to jump from a $14 billion price tag (based on the eventual $26 IPO price) to a $36 billion price tag in a matter of weeks, a person considering purchasing Twitter shares has to ask themselves if they truly have a unique insight into the future of Twitter's operating model, competitive forces, etc., or if they are buying the stock because the chart looks good and the stock has momentum?
It is worth stating again: people purchasing Twitter shares with little regard for fundamentals are not investors at all, rather they are speculators. Yeah, yeah, Twitter is going to change the world. But at what price does it make sense to be a shareholder?
We all know that speculation - allocating capital with little regard for underlying value - ends badly, especially for those who buy at the tip top. Twitter may well sport a justifiable $50 billion market cap someday, but the risk-adjusted returns available to investors buying at a $36 billion price today are razor thin, if a positive expected return at all.
Investors would do well to sit this one out and look for better investment opportunities elsewhere.