Behind the astonishing success of microblogging service Twitter’s Initial Public Offering (IPO) lies hope. Hope that the extraordinary explosion in human interaction spurred by Twitter and the social media giants which preceded it into the IPO market, LinkedIn and Facebook, will transform the economic landscape of the internet. Hope that the tremendous surge in connectivity, especially mobile internet connectivity, upon which much of the eye-popping growth of social media is dependent, will translate into meaningful and profitable web-based economic activity, and not just endless updates on traffic jams and amusing cat pictures. Hope that the bubbling innovation and enterprise in the internet space will transform the fortunes of entrepreneurs — and investors — engaged in that space, and not just lead to transient paper riches. And above all, the hope that investors, battered and beaten by the meltdown of 2008 and its aftermath, will be back in the market — and the ‘thundering herd’ will once more roar down Wall Street.
This swell of hope gave Twitter’s stock wings when it finally reached the public. Offered at $26 per share, Twitter’s stock gained an astounding 73 per cent on opening day. This is even higher than the average of 63 per cent listing gains notched up during the dotcom boom of the 1990s, and well above the 15-20 per cent listing gains that successful non-tech shares had managed. Twitter has uncomfortable parallels with many of the dotcom successes of the 1990s, which hit stratospheric valuations, only to crash and burn a few years later. The most obvious one, perhaps, is that Twitter, like most of the dotcom marvels of that era, is yet to make profits. When Facebook went public, it had over one billion users, growing revenues and was making profits. Twitter has just 40 per cent of the revenue of its far smaller social media rival, LinkedIn. But its market cap is already much higher than LinkedIn’s $25 billion. And while the latter may be ridiculously overvalued at a P/E multiple of 108, Twitter doesn’t even have a P/E ratio yet, because it has no profits!
This is not to say that Twitter’s astonishing success with investors is based entirely on unrealistic expectations. Twitter has demonstrated it is able to monetise its user base better than Facebook and is developing patented technology-based solutions to crack the mobile advertising market, the Holy Grail of marketers. And remember, e-commerce giant Amazon also made losses before its IPO! Only time will tell whether investors will win or lose with Twitter. But for entrepreneurs everywhere, Twitter’s success offers a different kind of hope — that it is possible to convert a great idea into great wealth.