Twitter – The Speculation of the Day

Twitter goes public today on the NYSE under the name TWTR. Much hype and commentary has preceded this momentous event.

Twitter is one of the hottest social media apps on the planet and so the IPO has attracted tremendous attention. The initial price is set for $26 per share, which sets the overall value of the offering at 1.8 Billion.

When it goes on sale, trading volumes will be high and the NYSE is poised to try and deal with these volumes to avoid the kind of glitches that plagued the Facebook IPO. Hopefully they succeed.

The question on the minds of a lot of investors is whether this value is realistic. it’s a good question since the value of a public company rests on the level of earnings they can generate. Twitter has never generated profits, and isn’t expected to do so for another few years. So, at present, there is no solid basis for the value.

One thing the internet revolution has reminded us of over recent years is that a company needs a strong business model to survive. A business model includes a sustainable means of generating profits.

The business model of Twitter as envisaged in the IPO rests on advertising. At present, Twitter has an advertising model, but it is seen as an expensive means of advertising, so hasn’t been taken up as much as might have been expected.

On the other hand, Twitter is heavily used by business for communicating news of important events, earnings results, dividends and other corporate actions. It is also used for communicating sales specials and marketing initiatives

It’s especially suited to the burgeoning mobile market, where increasing numbers of users are getting their internet fix. So an advertising model that has these characteristics might have some potential.

But potential is the operative word here.

When the Twitter shares hit the market, a lot of people will buy in either directly on the IPO or after the shares start trading. They will figure a lot of people will be buying in and that will drive the price up for a while. Then they will take their profit, along with a lot of other people and the selling will drive the price back down. Where it ends up is anybody’s guess.

So back to the original question. Should investors consider buying Twitter? The answer is no, because investors are not speculators. it’s an interesting opportunity for speculators, both short term and long term, but investors would wait until the initial speculative flurry calms down and until there are some signs of a viable business model beginning to generate profits. That’s what real investors do.