Investing in Twitter (TWTR)? No Thank YouWhen potential investors read articles regarding Twitter, what they mostly see are graphs and charts that they could find anywhere on the internet. However, what we don't see is a common sense approach to why investing in Twitter at this juncture is a terrible gamble. There are three key things that will be discussed in order to enlighten you and to bring a different perspective to the table in order to show why Twitter is likely an unwise investment for most.
1. FACEBOOK COMPARISON
Facebook (NASDAQ:FB) investors, employees and ex-employees patiently waited for Facebook to go public in order to get paid. In 2004, early Facebook investor Peter Thiel who invested $500,000 in the company profited to the tune of 1 billions dollars after the company went public. In this situation an investor that had been invested in Facebook for 8 years sold his stock in the company. Or for the employees and ex-employees many of whom may have been underpaid in exchange for being able to get stock in the company, many of them liquidated their shares when they became unrestricted. Can you blame them?
A. Repeat of History?
"Early Twitter Investors Poised To Cash In," read one headline. Can you blame them? Now take a moment to look up related search terms regarding Facebook early investors which should cause you to make a mental note of one of many similarities. In the case of Twitter, early investors Union Square Ventures, Benchmark, Spark Capital are all expected to make a fortune off of the Twitter Initial Public Offering (NYSEARCA:IPO) if they haven't done so already. When you have different companies that have been invested in Twitter as long as 7 years they are going to likely liquidate their position by running to the nearest exit like in the case of Facebook. On February 15th, 2014 is the earliest time in which Twitter will permit its employees and ex-employees to sell their stock in the company. My hunch is that as more and more shares of Twitter become unrestricted the stock will decline as did Facebook when its employees gained the freedom to sell their shares. Analyst like to compare and contrast the business models of Facebook and Twitter regularly but ignore similarities like this that maybe of importance to the investor on Main Street.
2. 7 Years of Zero Profit
Since the founding of Twitter in 2006 they have never turned a profit. Year after year money has been invested in Twitter with not one cent of gain. By my observation this company appears to be nothing but a money pit. Do you agree? Every article that I have read list reasons to invest in Twitter but have been unable to say anything convincing other than to say, "Twitter has a lot of potential." or "its membership is growing." There needs to be a greater threshold that a company must meet other than having a lot of potential if they truly want to be worth over $20 billion dollars. Again, we are talking about $20 billion dollars. Twitter appears to be a company that was created with one great idea but lacks the vision of Steve Jobs or dare I say Mark Zuckerberg.
3. How I One Day See Twitter
I one day see Twitter as a pager or a 1980's Gordon Gekko cellular phone, unattractive and useless but once played a more prominent role in society. I one day see Twitter as a Blockbuster Video, a relic of a bygone era. I one day see Twitter like Netscape, totally and utterly irrelevant. Ultimately, you must discover why you may or may not want to risk your capital on Twitter. With new technology being developed at an increasingly fast rate you must asked yourself if you will continue seeing the usage of Twitter remain at the same rate or higher over the next 10 years? None of it is sustainable. Do you really believe that a child that is currently 5 years old will be utilizing Twitter in 20 years? Hell no. They will only wonder, "what is a Twitter?"
Not all that glitters is gold. Not every company with a market capitalization in excess of 20 billion is really worth 20 billion. I believe Twitter is a "moment in time" company instead of a company that stands the test of time. Over the next few years I do see day-traders profiting from the volatility Twitter is likely to have. One would be foolish to hold this over the long term. Early investors and employees have made or plan to make their money on the stock after the restriction period ends. With that said, over the long term retail investors and pension funds for example will get slaughtered for coming late to the party.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.