What does this mean for
investors?
If you like using Twitter, buying
its stock allows the opportunity to have a share in the company and in its
fortunes going forward. By the end of trading on Thursday, Twitter had been
valued at roughly $31.7 billion by investors.
Twitter soared from an opening
price of $26 into the $40s instantly and has been deemed a very successful IPO
offering. That said, smaller retail investors were not able to get in on the
IPO and were led to make their purchases on the open market. From its close on
Thursday the company fell 7.24% in Friday trading as some investors took money
off the table.
Given its massive worldwide
usage, there is no doubt that Twitter has outstanding reach with consumers and
has found its way into the households of everyday citizens. With over five
hundred million tweets per day, there is a lot of content for the company to
look at turning into dollar signs. The question over time will be how the
company can continue to monetize itself and build on its ad-revenue to generate
earnings.
I find it difficult to accept a
$30 billion price tag on a company that is not generating profits. What an
investor has to accept if they purchase Twitter is that they are buying the
hope of future profits and gains while accepting the risk that Twitter may
never realize this. There is substantial execution risk in that management may
not be able to bring their vision of the company to fruition. Companies in such
a situation are subject to extreme volatility in their share prices. For
instance, should Twitter miss analyst estimates each time they announce their
earnings reports, investors should be aware that they may be subject to serious
downside on their stake in the company.
Competition...
Twitter faces competition from
many other social media companies which all vie for advertising dollars and for
the eyeballs of users globally. Facebook (NASDAQ: FB), LinkedIn (NYSE: LNKD),
and other big-hitters are all working to carve out their own space within the
online arena. Over time, I find it likely that users will become overburdened
(if they are not already) and social networking sites will get thinned out as
people become more selective with their time and choosy as to where they decide
to build their online presence.
The bottom line...
I will not be buying Twitter any
time soon. While Twitter may offer upside in the form of capital gains, a
company that is not kicking off profits does not pay a dividend (and certainly
not a stable one), and as such it falls outside of my investment criteria.
The company poses an unnecessary
level of risk for my portfolio and does not meet my minimum requirements for
investment. While I do operate on Twitter as @DividendTitan, I will pass on
owning its shares.
Full Disclosure: No position in any
stock mentioned and no intention to initiate one within the next 72 hours.
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