News

Why You Shouldn't Invest In Twitter

by Jenny Hollander

Amid a frenzy Thursday, Twitter made its debut on the New York Stock Exchange, priced by the company (a.k.a. TWTR) at $26 apiece. When a wildly successful start-up and household name like Twitter files an IPO and goes public, it's tempting to invest in a resource you already love. And investors are lining up in droves — though trading prices are reportedly already up at roughly $45 a share. Twitter's stock is already hugely over-subscribed, meaning it might take days to get your hands on a single share. That makes sense: why wouldn't Twitter be a huge financial success, given its solid presence in the daily life of millions of Americans already? Except... hold on a second.

Twitter is successful in that it's a primary source of news for most young people, is challenging Facebook as the primary communication tool for millennials, and is used by ad firms. But it's never seen financial success, because it's never, ever been profitable. Sure, it's a start-up, but it's also seven years old; in all that time, its profits have never eclipsed its operating costs. Eighty-five percent of its profits last year came from advertising, and the rest from licensing agreements, meaning that involving ad firms hasn't done a world of financial good for Twitter so far. And its self-priced $26 stock value (now up at $45) might not sound like much, but the $26 price tag is actually 33 times Twitter's revenue. That's the largest gap between revenue and value price since at least 1975, according to USA Today.

It's also the largest Silicon Valley stock offering since Facebook's arrival in Wall Street last year. But Facebook was already making money by the time it launched its IPO, and its stock price promptly plummeted, struggling for almost a year before clawing its way back to its initial value price. Facebook was also more appealing to advertisers, since it had all of its users' personal information available: preferences, likes and dislikes, friend lists, you name it — all advertisers had to do was pick a demographic, and aim a product at those people.

As a business model, Twitter is still in its infancy, and analysts point out that its IPO filing isn't entirely clear about how Twitter actually plans to make money. Some have pointed out that it's probably too early for a company like Twitter to go public, but the investment climate is good at present, and Twitter apparently couldn't resist.

Also, Twitter's potential is still largely unknown. Its success will depend on whether it can act as a practical resource for advertising firms, and some analysts believe that, if done right, the financial potential is enormous. Measurement firms like Nielsen are beginning to use it to track communication about TV shows, looking at how many watched versus how many Tweeted, and so on. There's no doubt that a company that stores data about that many topics, from that many people, can be a useful tool for targeted advertisements. To do that, however, Twitter will need to maintain its stronghold in the social-media arena. Until last year, Twitter's membership climbed double figures every quarter, but now its gains are evening out: Twitter users grew by just six percent between June and September.

To the average Twitter user, investing dolla bills in your favorite social-media tool feels like a safe (ish) bet because we know Twitter: we know how many users there are, how it works, what gains it's making, and, thanks to media attention, what its quarterly gains and losses are. This is an illusion. "It's not for amateur retail investors because it's a fool's game," one analyst told ABC News. "You don't have all the information. The big firms have all the information and they know the real value."

And Twitter doesn't particularly want their average user to buy stocks — they're looking for long-term, big-name investments to inject cash in the company, which is the same financial model they've stuck to since they first launched. Though the initial jump in valuation implies that Wall Street believes Twitter is a good investment, that doesn't necessarily translate to a good buy for the everyday person. So, if you're looking to invest in, um, hashtags, hold on just a minute: it might be a good idea to let the dust settle.