Twitter Punished After Whipsawing Wall Street Over Value: Tech

May 08, 2014 4:09 pm ET

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May 8 (Bloomberg) -- Twitter Inc. is getting punished by investors after whipsawing Wall Street over how to value its business.

The San Francisco-based microblogging service, which makes money from advertisements, said at the time of its initial public offering in November that its user growth was paramount. Now Twitter insiders say a more important metric is the reach and impact of the short messages that people send through the service -- and the value of the ads embedded in the tweets.

“When they filed to become public, they presented a set of metrics that they indicated folks should measure them by,” said Scott Kessler, an analyst at S&P Capital IQ in New York. “Now they’re suggesting those data points might not be as relevant.”

Twitter’s shares fell to a record low closing price of $30.66 yesterday as investors questioned the company’s worth. Last month, Twitter reported that user growth is decelerating, even as advertising sales continue to gain momentum. The resulting turbulence in the stock underscores Silicon Valley’s struggle to explain how to evaluate a newly public Internet company that is still finding its financial footing and is expensively valued.

Pattern Recognition

Twitter’s stock woes -- part of a broader selloff in technology companies including Amazon.com Inc. and LinkedIn Corp. -- are familiar to investors in emerging technology companies.

Yelp Inc. almost doubled in the weeks after its 2012 IPO, before plunging more than 50 percent over the next few months and then surging from about $15 to almost $100. The stock now trades at about $53. Facebook Inc., Groupon Inc. and Zynga Inc. also all plummeted immediately or soon after their IPOs; while Facebook has since recovered, the others still trade at a fraction of their offer price.

“Wall Street is a fickle place,” said David Steinberg, chief executive officer of New York-based Zeta Interactive, an online marketing company. “The Twitter guys are damned if they do, damned if they don’t.”

Others say Twitter is valued too highly to make any excuses.

“You can’t be that big and say ‘Don’t worry about this or that,’” said Ben Schachter, an analyst at Macquarie Securities USA Inc., who has the equivalent of a sell rating on the stock. “You have to be firing on all cylinders.”

Jim Prosser, a spokesman for Twitter, declined to comment.

Ad Business

Twitter’s stock plunge, which was compounded by the expiry of a lockup period earlier this week, is unfolding while the company has made progress in its underlying business. The company reported in April that first-quarter revenue more than doubled to $250 million, with most of that coming from advertising on mobile phones. While Twitter lost $132.4 million in the quarter, the company also said sales growth remains on track and forecast revenue for the second quarter that may beat analysts’ estimates, according to data compiled by Bloomberg.

Twitter shares rose 4.2 percent to $31.96 at the close in New York. The company still trades at a level that makes it more expensive than LinkedIn and Facebook based on projected 2014 sales. Twitter trades at 18 times its estimated sales this year, compared with 16.8 times for Facebook and a ratio of 16.1 times for LinkedIn, according to data compiled by Bloomberg. It is even more richly valued by its price-to-earnings ratio.

Given that, Twitter is also being reassessed amid the broader technology-stock selloff, said James Gellert, CEO of Rapid Ratings International Inc., a New York-based firm that uses quantitative models to grade securities.

“With Twitter you have a company that is more disproportionately weighted to hope and expectations than it is to reality and history,” said Gellert, whose firm rates Twitter 16 out of 100, with 100 being safest.

Mixed Messages

The roots of Twitter’s mixed investor messages lie in its IPO prospectus from October, in which the company pointed to two metrics as particularly important. One was its number of monthly active users, or the amount of people who log into the microblogging service at least once a month. The other was timeline views, or the total number of times that pages on Twitter are visited.

In February, Twitter reversed course. The company told investors not to worry as much about how often people were checking their timelines -- a number that dropped for the first time that quarter from the prior period -- because it was no longer as important as a measure of engagement.

On a conference call at the time, Twitter CEO Dick Costolo said the number of timeline views may have decreased because Twitter had worked to make each one more valuable, with more people clicking to share and “favorite” each others’ messages. Improvements to the product also made it easier to navigate, so users didn’t need to click around as much, he said.

Active Users

Now some Twitter insiders are also downplaying the significance of monthly active users, as the company’s rate of adding members decelerates. The company said last month that membership in the first quarter reached 255 million, with year- over-year growth falling to 25 percent from 30 percent in the previous period.

Chris Sacca, an early investor in Twitter who owns 15 percent of its shares through various arrangements, has said monthly active users aren’t the right way to gauge the microblogging service. While the number is important to the strength of Facebook’s social network, Twitter’s purpose is in spreading information so the impact of what is shared may go beyond the microblogging service itself.

“Monthly active users might actually be the worst metric for judging the impact of Twitter and its business model,” Sacca said.

More Explanation

Last week, Costolo said on Bloomberg TV that the company has work to do in explaining how to evaluate its reach. Beyond activity on Twitter.com, tweets are posted more widely on TV and elsewhere, he said. Ads distributed through the company’s network can also reach more than 1 billion smartphones.

“It’s incumbent on us to articulate the story of just how big the broader platform is and that it’s so much bigger than just the website or application,” he said.

Valley Support

Some of Twitter’s early investors said the company still has plenty of potential.

“Nothing in the last few weeks has changed our belief in the company or our support of its leadership,” said Matt Cohler, a venture capitalist at Benchmark, which invested in the microblogging service when it was a startup. “We’ve always thought of Twitter as having exceptional long-term potential.”

The debate over Twitter’s value illustrates a divide between how public investors and Silicon Valley executives view the company.

“It’s hard for Wall Street to value Twitter’s place in the world’s popular culture,” said Alex Lloyd, founder of Accelerator Ventures in San Francisco. “They’ve become a part of our culture and language. Think back to the Super Bowl: every product, person and ad had a Twitter hashtag. No company or brand could buy that kind of free exposure. It’s invaluable.”

Still, no matter what Twitter says, monthly active user numbers will continue to be an important way to compare it to other Internet properties, said Macquarie’s Schachter.

“If you don’t grow the users, you’re just not going to make that much money,” he said.