Now that Twitter is public (NYSE:TWTR) you may consider adding it to your portfolio. But whether you use it or not, should you buy it? Twitter’s current market cap (as of 11/19/13) is $22.74 Billion. Everyone who bought shares in twitter on 11/19/13 believes that the company is worth over $20 Billion and as this is an investment they actually believe it is worth substantially more.
Let us take a look at opportunity cost with similar companies and some of what we know about Twitter. Here are some numbers from Twitter, Facebook, Google and LinkedIn. Twitter is circled in Red.
Image from : http://finance.yahoo.com/q/co?s=TWTR+Competitors
You can see the market cap of each company as of the close of the markets on 11/19/13. A couple numbers to look at together are the Market Cap, the Revenue and the Net Income. Interestingly enough LinkedIn is close to the same Market Cap as Twitter; however LinkedIn has twice the revenue and is profitable. Twitter is the only one of the four that is not profitable with a trailing twelve months loss of $142.56 Million. Notice that while Google has the largest Market Cap at $342 Billion, it also has the largest profit by far of $11.74 Billion.
The market cap is the worth of the company based on the total number of shares and the price per share. If you were to tell me that a private company has a market cap in the billions and is losing money I would not flinch. Why? The market cap is based on private investors determining a valuation based on the best information one can get, they have the privilege to do extensive due diligence. However I have a hard time looking at a $22.74 Billion market cap for a public company that is losing money. The price of a share today is not what someone believes the company is worth right now but what it will be worth in the future, I know that, but still $22.74 Billion?
So if the value of the company is it’s future worth, what factors will drive future worth and do you believe it will be worth that much?
Actually if you are buying the stock here you not only believe it is worth $22.74 Billion but what you are saying is that you think everyone is wrong, you believe it is worth more than $22.74 Billion, who are you? and why? If you are day traders fine, I get it, but if you have a buy and hold strategy for the long term with Twitter, why? What am I missing?
How Much Money did Twitter Raise
After the IPO how much money did Twitter put in their pocket? Twitter raised $1.82 billion after selling 70 million shares. That is an amazing raise and more than they need for operations after revenue for a long time. Therefore it gives them capital to expand by either building or buying. This means that you believe the current management of the company will use that money wisely, potentially make smart acquisitions and drive themselves to that $20 Billion+ valuation.
What is the Bottom Line? Answer: Net Income
The bottom line, as you can see from the competitor comparison is Net Income. Net Income tells you whether or not there is a profit. Three of these companies have a profit, one does not. One of these does not look like the others. At this stage it is not a big deal as most everyone would consider Twitter a growth company. Also if you compare the money raised to the net loss you see that they have plenty of runway.
What are the incentives of the Owners?
There was a great point about who owns twitter as opposed to who runs twitter here in an article by Matthew Yglesias. The point to paraphrase, is that those that run the company have very little equity while there are two individuals with substantially more equity than the CEO and those two individuals have nothing to do with day to day operations. It is not uncommon for one individuals percent of ownership to be small relative to the total when you are talking about a public company. However in this case two others own 5x and 12x the CEOs ownership percent and other tech stocks have owners with substantial equity positions. So what is the point? If you are buying stock in a company and the person running the company has a substantial equity position then they will care even more than if they did not. While that may be the case I do not see it as a negative as long as those in decision making roles are incentivized more than they would be elsewhere.
So Should You Buy Some of Twitter?
That is a question only you can answer. However I urge you to do your research and unless you have unlimited funds then it is an issue of opportunity cost. Do you believe your money here will grow faster than your money elsewhere?