Pin­ning a tail on what­ever…

Ex­perts were caught on the wrong foot by Twit­ter’s share de­but

Weekend Argus (Saturday Edition) - - MEDIA& MARKETING - ME­GAN MCARDLE

WASH­ING­TON: So Twit­ter opened at $45.10 in its first day of trad­ing.

Call me a fo­gey, but I just don’t get it.

Don’t get me wrong: I love Twit­ter. I spend all day on Twit­ter. I check my ac­count with a reg­u­lar­ity usu­ally ob­served only in lab rats that get co­caine ev­ery time they press a lever. Thanks to my as­sid­u­ous tweet­ing about ev­ery­thing from the gold stan­dard to din­ner party menus, my ac­count (@ asym­metricinfo) has an im­pres­sive 17 550 fol­low­ers.

So I’m not some crotch­ety grandma who can’t un­der­stand why the kids would want to do all this twit­ter­ing and hip-hopet­ty­ing. I get the ap­peal of Twit­ter to its many mil­lions of users. What I don’t get is how the folks op­er­at­ing this valu­able and amaz­ing ser­vice are go­ing to make a lot of money out of it.

The fact is that when it comes to valu­ing a tech­nol­ogy stock, it’s stupidly easy to get any num­ber you want. Here’s one ex­treme: the val­u­a­tion of any com­pany should be equal to the net pre­sent value of its fu­ture div­i­dends.

Twit­ter is go­ing to pay no div­i­dends for the fore­see­able fu­ture, there­fore, its value is zero.

Or, here’s an­other ex­treme: Twit­ter should eas­ily be able to gen­er­ate $5 bil­lion a year in rev­enue pretty soon, and grow to that level very quickly, which would jus­tify a mul­ti­ple of, I dunno, 12X rev­enues. Which would mean a cap­i­tal­i­sa­tion of $60bn, or about $110 a share.

The point is that any val­u­a­tion for Twit­ter is a re­sult of guess upon guess upon guess. Take Henry Blod­get’s at­tempt, for in­stance. We know with rea­son­able cer­tainty that Twit­ter is go­ing to gen­er­ate about $625 mil­lion in rev­enue this year, so why not tre­ble that num­ber, and de­clare that its rev­enues are go­ing to grow to $2bn in 2015? Then, mul­ti­ply that num­ber by 10, since that’s more or less where Face­book and LinkedIn are trad­ing – and you get a val­u­a­tion of $20bn, or about $35 a share.

If you wanted to get a bit more so­phis­ti­cated, you could try us­ing prob­a­bil­ity dis­tri­bu­tions in­stead of hard num­bers – but we have no more in­sight into the prob­a­bil­ity dis­tri­bu­tion for Twit­ter’s 2015 rev­enues than we do into a sin­gle fore­cast for those rev­enues. And there are cer­tain val­u­a­tion met­rics, like “the amount of money Twit­ter might get bought for”, which are even more ten­u­ous – yet clearly im­por­tant.

So I’m not think­ing about arith- metic. I’m just try­ing to fig­ure out where the money might come from.

The an­swer seems to have to be “ad­ver­tis­ing.” But how much ad­ver­tis­ing can you re­al­is­ti­cally do in 140 char­ac­ters? Twit­ter doesn’t have a very good an­swer for that yet, and I haven’t heard a con­vinc­ing ex­pla­na­tion for how al­ter­na­tive mod­els – like charg­ing net­works to tap into the Twit­ter­storm that sur­rounds a big TV episode – are go­ing to gen­er­ate the kind of cash that would be needed to jus­tify a $45 val­u­a­tion. Twit­ter pro­vides a very valu­able ser­vice. But it’s not yet been proven that it’s valu­able enough for peo­ple to pay the cost of pro­vid­ing it.

Of course, as a friend in the tech busi­ness just pointed out to me, we both thought that Google’s IPO was over­val­ued. Twit­ter has a big base of users who are ex­tremely en­gaged with the ser­vice. That’s a hugely valu­able as­set.

On the other hand, as the Groupon Inc IPO showed, hav­ing a lot of users is not, by it­self, enough. You also need a way to mon­e­tise that user base, and that doesn’t al­ways ma­te­ri­alise. And the trou­ble with Twit­ter is that ex­actly what makes peo­ple like it – the brief up­dates and the evanes­cent na­ture of the stream – is what makes it a weak ad­ver­tis­ing medium. There may be a di­rect trade-off be­tween users and ad­ver­tis­ing: push ads too hard, and you’ll lose the users you need to see the ads.

If Twit­ter were al­ready mak­ing a bunch of money, then that risk would be well worth tak­ing. But it’s not, and I just don’t see the prom­ise that so many oth­ers seem to. That’s not to say Twit­ter is doomed – I’ve ob­vi­ously been wrong be­fore. But I wouldn’t put any $45 into a share of its stock. And see­ing so many oth­ers will­ing to do so makes me wonder whether this is be­cause I’m miss­ing some­thing – or be­cause we’re all so des­per­ate for good in­vest­ment op­por­tu­ni­ties that we’re will­ing to throw money at any com­pany peo­ple seem to like, whether or not it’s mak­ing money.

SLAM DUNK: The Twit­ter logo is dis­played on screens be­fore its IPO on Wall Street onThurs­day. Shares soared 92 per­cent on their first day of trad­ing, and drove the com­pany’s value to more than $25 bil­lion. PIC­TURE: REUTERS

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