Sky-high hopes send Twitter soaring on debut

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The rationalisations from the Wall Street professionals began almost as soon as Twitter’s stock had taken off like a rocket on Thursday morning.

If Twitter’s advertising messages were thought of as being as valuable as Google’s search ads and if it tripled the number it displays, it would quickly justify the heady price the bulls have placed on it, according to an analyst from Evercore who was among those lining up to fete the IPO on the financial TV network CNBC.

But the best explanation for the soaring share price had little to do with a rational assessment of Twitter’s chances of becoming the next Facebook or Google and everything to do with the animal spirits of a market that hadn’t seen such a made-for-TV party in years.

“Everybody loves a lottery – especially a megabucks lottery,” said Roger McNamee, a veteran Silicon Valley investor who has as portfolio manager, venture capitalist and private equity investor through a succession of tech booms and busts. “The fact you have a valuation that doesn’t relate to anything else shows that all people are looking at is whether the next trade is up or down.”

For anyone searching for real-world yardsticks by which to measure it, the $45.10 a share at which trading opened on Twitter’s first morning as a public company certainly tested even the most optimistic assumptions.

It represented, for instance, $139 for each of the 230m unique users who visit Twitter each month. That is higher than the $99 price that Wall Street puts on each of Facebook’s active users – even though Facebook is expected to generate $6.50 of revenue for each of its users this year, or more than three times the amount Twitter will produce.

The Twitter bubble puts it even above the $127 per user valuation that the professional social network LinkedIn commands on Wall Street – itself a heady price that is far above LinkedIn’s own IPO price of two years ago, though it is at least partly justified by annual revenues per user that are around four times those of Twitter.

The sky-high hopes for Twitter came a day after Mary Jo White, head of the Securities and Exchange Commission, warned that there was a danger of investors becoming over-impressed by the large numbers of users that internet companies can produce, without paying enough attention to whether they can generate profits from those audiences.

The warning echoed the dotcom bubble of the late 1990s, when many new internet companies with no revenues at all were valued based on the “eyeballs” they could attract. Even the pessimists on Thursday said that comparisons with that period were unwarranted, given the substantial businesses that other social media companies have already built – though they questioned whether Twitter would grow fast enough to justify its stock market debut.

“If you can get me to $6bn of revenue in 2018, I can get to $45 [a share],” said Brian Wieser, an analyst at Pivotal Research. “But that’s kind of hard.” His own estimates, he said, pointed to revenues of $4bn by then – prompting him to issue a “sell” recommendation on the company within minutes of the start of trading on Thursday.

Based on Twitter’s history as a revenue-generating enterprise, even that goal may prove a stretch. Twitter became a byword in Silicon Valley for its slowness in producing revenues, before finally reaching a level at which it could go public, said Mr McNamee.

“Anyone who is trading a stock with a lot of momentum will tend to buy and then back into a rationalisation to justify it,” said Mr Wieser.