Should You Buy Twitter?

Courtesy of www.siliconangle.com

Image courtesy of www.siliconangle.com

Much buzz has been hitting the business news today regarding the IPO (Initial Public Offering) of Twitter.

It’s no surprise investors and traders are interested in getting a piece of the action, especially after the large-scale IPO’s of Facebook and LinkedIn. Twitter is essentially the last big social media giant left to invest in. Together, these three social-media giants dominate the current web and mobile landscape.

Of these social-media giants, Twitter is probably the best positioned and integrated in the ever evolving mobile landscape. It was right from the start.

Personally, I much prefer using Twitter over Facebook. Twitter’s online practices are far less secretive and insidious than Facebook. Twitter is easy to use, and works seamlessly on mobile devices. It also has brand recognition and massive global reach. According to the Alexa Ranking, Twitter is the 10th most used website in the world, with Google in the No. 1 spot, Facebook being 2nd, and LinkedIn being 8th. Twitter is a significant influence on the web and our modern life, with over 215 million active monthly users.1

I’ve never been a Facebook fan, but I’ve always enjoyed using Twitter. For me Twitter is also one of the best toolboxes in my blogging and web empire. When I write a post, I can immediately let over 2100+ followers know there is new material on my website, and that gets retweeted and mentioned. In fact, Twitter is my 3rd highest source of referral traffic on the Dividend Ninja, and is far ahead of the traffic I receive from Facebook. It obviously provides a net-benefit for those of us who use it.

Is Twitter a Good Investment?

Does my familiarity and use of Twitter make it a good investment? Is it a safe investment?  This is where as an investor I need to separate my personal bias from an investment decision. Just because I like Twitter and feel familiar with it, doesn’t mean it is good investment or even a safe investment.

While I’d love to throw some money on Twitter to see what happens, that is really akin to gambling. A purchase in Twitter does not fit into my long-term dividend growth strategy, and I doubt it fits into an index investing strategy either. It may be a solid Fortune-500 dividend payer when I’m 55, but at the moment it’s nothing more than a new IPO.

The Fundamentals

Looking at the fundamentals, Twitter is hoping to raise $1 billion dollars through the IPO. According to a couple of articles in the Globe and Mail (referenced below), the fundamentals for Twitter are far from pretty. Twitter has never generated a profit1, and in the first six months of 2013 posted a $69.3 million dollar loss.2 In addition it has acquired a net deficit (that means debt) of over $418.6 million dollars.2

While it may be one of the most popular websites in the world, its 215 million monthly users are paled by Facebook’s 1.1 billion monthly users.3  When you start to peel off the glitz there really isn’t a lot under the Twitter hood, other than its name and monthly users. Twitter is estimated to be a $1 billion dollar IPO, without profit or revenue, bleeding millions of dollars per month, and carrying over $418.6 million in debt. While a gigantic cash infusion would likely breathe new life into Twitter, the real question is will it be enough? Much like the Facebook IPO, Twitter also has an unknown revenue model with a lot of future uncertainty.

IPOs Are Like Roller Coasters

If you like day-trading, and roller coasters then this IPO is for you. I covered the Facebook IPO in an extensive three-part series back in May 2012. Facebook was offered at an initial IPO price of $38, sank to $34.03 at the end of trading day. Shares of Facebook would have even slid further, if the underwriters didn’t step in to prop up the price. Investors who bought on IPO day likely paid over $40 for their shares.

In the months that followed shares of Facebook sunk to a low of $18.06. Facebook has indeed been a turnaround company, with shares now trading at $51.04 per share. Analysts are now starting to see fundamental value in the company. However for those investors who bought on IPO day, and had the super-human fortitude to hang on, it’s been a gut-wrenching and nail-biting ride.

The same can be said for investor who also bought tech IPOs such as LinkedIn and Groupon. Again LinkedIn has been another success story, but it was also another gut-wrenching ride for investors from IPO day. Groupon shares sank below $3 months after the initial IPO price of $20 per share, although they have since rebounded over $11 per share. Point being tech IPOs (as with any IPOs) are risky. Can you handle this kind of volatility?

I’m sure Twitter shares will soar on IPO day, and investors and traders will make small fortunes in the weeks and months to follow. However I’m content to sit on the sidelines. I’ll collect my dividends from my solid blue-chips, and wait this one out. Although I love Twitter, I won’t put my money on it. ;)

Reader’s what’s your take? Are you buying Twitter on IPO Day? Do you think Twitter is a good investment?

Sources:
1. Globe and Mail: Twitter Preps for IPO, But Are Investors Feeling Social?
2. Globe and Mail: Twitter Sees Meteoric Growth, but Profit Elusive as IPO Looms
3. Wikipedia: http://en.wikipedia.org/wiki/Facebook#Reception


19 Responses to “Should You Buy Twitter?”

  1. Ben

    Oct 05. 2013

    Tons of good info and research in this post. Investors do tend to get excited about IPOs for some reason. Better to wait these things out and leave it to the speculators. Great advice and really well thought out article.

    • Dividend Ninja

      Oct 05. 2013

      Ben, thanks!

      While I love Twitter it certainly does not belong in my portfolio. I think this is going to be another one of those gut-wrenching rides for investors, with many to become disillusioned. Better to wait and bottom-feed if you really need to invest here. ;)

      The way I see it Twitter had no choice but to go public. I had no idea the fundamentals were so bad. They either had to sell or go public to stay afloat.

      Cheers

      • I don’t think Twitter has the wide moat necessary to increase earnings and boost dividends for ten years.

        Neither does Tesla, but that’s another story about Irrational Exuberance.

        Of course, if you were one of the first employees who got stock/options, bravo.

        • The Dividend Ninja

          Oct 10. 2013

          DGI, even Facebook has a moat that Twitter doesn’t have. And I am not a FB fan either. ;)

          Cheers

  2. Roadmap2Retire

    Oct 05. 2013

    Good points, Avrom. Tech giants usually tend to fall once the initial IPO excitement has settled in, a la Google and Facebook. With the state of Twitter’s books, it will take a while before the stock can be stable. Its not for the fainthearted, and definitely not for blue-chip-dividend-strategy folks either.

    Twitter, for their own sake, hopefully have a good game plan for how they are going to monetize their product and that will be critical. Having said that – I am a huge fan of Twitter and want them to succeed :)

    • The Dividend Ninja

      Oct 05. 2013

      Yes, I think we are all rooting for Twitter! It’s a great online service. ;)

      But man it really looks like a big financial mess before they even get out of the starting gate. Perhaps their name will be enough to push through.They will be able to pay off all the debt with the IPO proceeds. But their plan looks shaky… and if they keep on the same track looks like they will just rack up more debt.

      But as PIE clearly states below, it doesn’t match any of our investing criteria, or provide any income.

      Cheers

  3. No Tweeter for my portfolio. It doesn’t match any of my investing criteria.

    I need dividends and a necessary business that has establish an economic moat.

  4. My Own Advisor

    Oct 06. 2013

    Nah, count me out for Twitter as a stock in my portfolio. Same with Facebook, I would never buy it.

    I suppose I’ll own it indirectly via VTI if the market cap becomes big enough.

    Great details in this post, good references, I didn’t know it was ranked so high via Alexa.

    My Alexa ranking is around 118,000. I have some distance to go to catch up :)

    I like using Twitter as well. In fact, I just might tweet this!

    Cheers,
    Mark

    • The Divdend Ninja

      Oct 07. 2013

      Mark I hear you…

      It’s more fun to sit on the sidelines, and see what happens without having to worry about it. As Ben mentions, people are drawn to IPOs. Just like buying a new car, it looks all clean and glossy. But as soon as you drive it off the lot it loses money.

      Think of your Alexa this way – there are only 117,999 more sites in the world more important than yours. :)

      Cheers

  5. Kevin

    Oct 10. 2013

    Why is it that lately in my email feed I only get part of the blog post then I need to click a “view article..” link that goes onto the internet. At work I can no longer read your full posts now. :(

    • The Dividend Ninja

      Oct 10. 2013

      Kevin,
      I sent you a personal email. I will work on putting back full-posts for those with RSS Readers… I want to keep you guys happy! :)

  6. Levi Blackman

    Oct 12. 2013

    I didn’t get into Facebook because I remember what happened to Myspace no to long ago. I worry Twitter will be the same type of deal. Once these websites go public they seem to push revenue generation and making the sites make money more and more until they lose their usefulness and people move on.

    I may be wrong, and I love Twitter, but I think I am going to invest in something else.

    • Dividend Ninja

      Oct 14. 2013

      Levi,
      I think you hit it bang on! Once these kinds of companies go public revenue-generation is indeed more important. I think this will lessen the user experience.

      And I full agree you should invest your money elsewhere… After the IPO rush, these kinds of stocks usually dive, and I honestly cannot see the long term growth and fundamental value here.

      Cheers

  7. Ryan

    Oct 14. 2013

    Avrom,

    Great article- it’s crazy how rare it is to read an article that cites sources these days! Ninja articles seem to hold a much higher journalistic standard than much of the crap I sift through on the web. I wanted to reach out through the contact form, but wasn’t able to. Could you contact me via email?

    • Dividend Ninja

      Oct 14. 2013

      Hi Ryan,

      Thank you so much! I really appreciate the feedback, and positive support. I will get in touch with you soon. :)

      Was migrating my site last-night to a new server, probably the issue but will double-check the contact form. Thanks for letting me know.

      Cheers
      Avrom

  8. Dan Mac

    Oct 25. 2013

    I read an article today discussing how teens now prefer using Twitter over Facebook. It’ll be interesting how demographics shift going forward and different social media sites come in favor over the older ones.

    I don’t invest in IPO’s because I don’t like all the hype that makes the volatility too uncertain. I’ll stick with the ol steady blue chippers and be happy.

    By the way you must be doing something great with Twitter. I thought I was doing well growing my following to close to 200! I’ll have to reach out for some tips sometime soon!

    • The Dividend Ninja

      Oct 25. 2013

      Hi Dan,

      Yes I agree – stick with the solid dividend blue-chips. Slow and steady wins the day!

      Cheers

  9. Dividenden-Sammler

    Nov 09. 2013

    I think Twitter is at the moment not a good buy!
    The IPO was incredible!

    I think it could happen as the company “The street” (Jim Cramer)!:

    http://investing.money.msn.com/investments/charts?symbol=US:TST#

    Extremely high pushed and then it went all downhill!

    I will not buy twitter!

    Best regards
    D-S