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Can someone with more clue please tell me that the following cynical thought I keep having is wrong and laughably misinformed (and then explain why)? Twitter's

• hyperpape 13y ago
  If twitter never makes money, you're mostly right. If twitter eventually makes enough money to justify its share price, you're wrong.
  • nine_k 13y ago
    In 2013Q3, Twitter made $168M of revenue (not profit). How do you think, how long is it going to take them to cover their current market capitalization of $24670M? After that, they will start making profit for the shareholders.
    • runako 13y ago
      How long ago was $168m their annual revenue? How long ago was their annual revenue $0? If you're making an argument that their revenue growth has plateaued, that's a separate argument. But their current growth curve is impressive.
      • silverbax88 13y ago
        Your point is valid, but past performance is not indicative of future performance. Just because Twitter went from $0 to $168M (which is chump change on the NYSE), that does not mean they will continue on that curve or that there's proof that they haven't already tapped their market.
        • Tossrock 13y ago
          Under Bayesian inference, past performance is the ONLY indicator of future performance...
          • silverbax88 13y ago
            Bayesian inference would only be relevant with the management team, not the growth of a market. In order for Bayesian probability to be used, it would require other exact or remarkably similar scenarios by which to build on.
          • sz4kerto 13y ago
            Not at all on the stockmarket.
    • harryh 13y ago
      Your comparison of revenue to market cap is nonsensical. Shareholders will make a profit if the stock goes up or if it pays a dividend.
• deleted 13y ago
  [deleted]
• nine_k 13y ago
  Well... I can't see a fault in your logic. Maybe you remember the dot-com boom in 1999? It looked somehow similar.
  • clarky07 13y ago
    Not really. not only did those companies not have profits, they also didn't have any revenues or users. Twitter has > 200 million users, and they are growing revenue 100% a year. Dot-com boom was a whole different animal.
    • nine_k 13y ago
      Let's calculate. Twitter revenue was $391M for last 4 quarters [1]. Twitter market cap is currently $24670M, or about 63 times the revenue. If Twitter's revenue grows 100% each year (that is, twice each year), it will take 5 years for them to catch their current market cap with revenue: 1 + 2 + 4 + ... + 32 = 63. But what investors are interested in is not revenue, it's profit. Let's imagine that Twitter discovers a magnificent monetization strategy that gives it 25% margin, like the one Apple enjoys. It would then pay out its market cap in 2 more years (4x growth). This assumes that Twitter will always enjoy unfettered 2x revenue growth and the same high margin each year, while its valuation stands still, as does the dollar inflation. All these assumptions look a bit unrealistic to me, alas. [1] http://www.businessinsider.com/twitter-revenues-2013-10 http://www.businessinsider.com/twitter-revenues-2013-10
      • sneaky_ruds 13y ago
        So your argument is that a company's value should be limited by 1 year's profits? Please start a company so that I may buy it from you.
        • nine_k 13y ago
          I projected literally exponential growth of revenue for Twitter. Well, if it does grow exponentially, it won't be bad! Supposedly their costs won't grow as fast, and they'll have some healthy profits. It will be a quite long-term investment anyway. Like, well, when Forrest Gump invested in AAPL.
• tootie 13y ago
  The market still has to be willing to buy at $40+ which they evidently are. They do this expecting to sell down the line for even more.
  • corford 13y ago
    So in effect it's just one giant speculation game that everyone's in on and the only trick is not to be left holding shares when the hype stops? I guess I'm fine with that as long as everyone playing knows the rules (although it's tough for the index funds that have no choice in the matter).
    • tootie 13y ago
      That's an oversimplification. For one thing, stocks can pay dividends even though few do anymore and Twitter seems unlikely to do so any time soon. Also, there's no reason the hype needs to ever die. GE has been trading for 120 years.
• brymaster 13y ago
  I think you accurately described the Greater Fool and the nature of this tech IPO climate. http://en.wikipedia.org/wiki/Greater_fool_theory http://en.wikipedia.org/wiki/Greater_fool_theory How else could companies with no revenue go public?
  • 001sky 13y ago
    quick note: no profit =/= no revenue
    • deleted 13y ago
      [deleted]
• clarky07 13y ago
  Sometimes it is just the public taking the fall. In this case, the loss making company has been growing revenues 100% a year so there is a chance joe public will end up doing ok. Even with the disaster that was the Facebook IPO, if you held for a little over a year you'd be up nicely. Also joe public isn't really joe public. Joe public is hedge funds and pension funds controlled by professionals. Your 401k or pension might have some twitter, but in that case it was a professional making the call. Regular twitter users aren't bidding the stock up. They make up a small part of overall trading activity.
  • dctoedt 13y ago
    > Even with the disaster that was the Facebook IPO, if you held for a little over a year you'd be up nicely. It could be argued that the Facebook IPO pricing was absolutely brilliant, in that Facebook and its selling shareholders received (what in retrospect was) top dollar under the then-extant market conditions, instead of in effect giving away hundreds of millions of dollars to the fortunate few who were able to purchase IPO shares.
• tomasien 13y ago
  I would say generally the market recently in IPOs has been losing the banks money, so you're at least wrong there. I do wish the public had a chance to invest in rapidly growing things like Twitter earlier - let's say 2010.
• trimbo 13y ago
  The term for this is "bagholder". Congratulations to whomever was on the sell side of this today. Sucks to be an employee who is locked up for 180 days.
  • nonchalance 13y ago
    It only sucks to be an employee if his shares or options are contingent on a market cap above the current price.
    • trimbo 13y ago
      I was a GRPN employee at IPO and I can confirm that even with your stipulation, it sucked.
      • clarky07 13y ago
        GRPN and TWTR are not the same. I can assure you, that things worked out just fine for GOOG employees. GRPN was very clearly broken. TWTR is not. Whether it is worth this or not I don't know, but I wouldn't expect it to behave like GRPN.
    • beagle3 13y ago
      No, it sucks to be an employee because it is possible that a material part of your wealth is now in a casino, your tax liability just matured, but your ability to pay for it is riding a train with a potential to crash, and all you can do for the next 180 days is watch.
• nonchalance 13y ago
  The simple answer is that a share price is the present price to pay for the future cash flows of the company. Just because they aren't making money now doesn't mean that will always be the case. If twitter starts making billions of dollars soon, and starts paying that out to investors, then everyone makes money. They "eventually foot the bill" if twitter doesn't make money. Your cynicism reflects the fact that many companies don't end up making enough money. But there are counterexamples like GOOG where joe public actually did fairly well
  • brymaster 13y ago
    > Just because they aren't making money now doesn't mean that will always be the case. This is dangerous speculation.
    • Karunamon 13y ago
      Welcome to VC. But seriously, that's the stock market for you. Gambling with lots and lots of rules.
    • nonchalance 13y ago
      It's also dangerous to assume that all companies must be profitable from day one. Facebook is a good example of a company that was "losing money" but was able to turn profits recently. Which is not to say that I believe twitter deserves the market cap currently implied by the share price.
      • brymaster 13y ago
        Facebook is also a good example of a company with its business model out of whack, meaning this ride isn't going to last.
    • rsobers 13y ago
      That's the nature of investing in stocks. If you want something guaranteed, open a savings account.
• jrvarela56 13y ago
  Apparently Twitter thought it was a good deal: http://www.cnbc.com/id/101110025 http://www.cnbc.com/id/101110025 Banks' incentives are misaligned: a higher share price raises fees collected from underwriting since they get a % of total money collected in the IPO; a lower share price leads to commissions, goodwill and management fees from the private wealth/managed fund clients. Could anyone elaborate on how these concerns are/may be separated to keep the process transparent?
  • this_user 13y ago
    The underwriter's goal is to facilitate a successful IPO. There are obviously different interests at play. The company and its investors would like to say as high a price as possible. The new public investors the shares are being sold to would like to see as big a profit potential as possible. The bank's job consists of choosing a sensible price point for all parties involved and advertising the offering so as to generate interest in the shares. Once the actual IPO happens, the public is able to see whether or not the bank did a good job. This in turn is important for the bank's reputation and ability to acquire future deals. The FB IPO was widely considered a failure because the initial share price was unsustainable. The underwriters had to buy massive amounts of shares on the IPO day to stabilise the price above the initial level. This, however, couldn't avoid the crash over the next months which lead to early public investors being underwater. Morgan Stanley's (as well as Nasdaq's) reputation took a big hit thanks to this and it will haunt them for quite a while. It's also the reason why the TWTR IPO is lead by Goldman Sachs and the shares trade on the NYSE.
    • acchow 13y ago
      Successful for who? The existing insiders? The underwriter? The new investors? (subscribers). The FB IPO certainly wasn't a failure in the capital raising sense. Fb raised a lot of capital than if they had IPO'd at $25 outright and the stock price had stayed there.
• tobyjsullivan 13y ago
  When you say "Joe Public" you make it sound like the stock is being bought with our tax dollars. Anybody who buys TWTR is making an informed decision and expects Twitter to do very well. It's hard to imagine Twitter today eventually being worth the current market cap of $25B. However, take a look at Google as a prime example of success. When GOOG first hit the market in 2004 it got a market cap of $23B. It was somewhat hard to imagine a web search company ever being worth that much. Today it's at $340B.
  • bct 13y ago
    > Anybody who buys TWTR is making an informed decision If only.
  • nine_k 13y ago
    Google had a solid, well-working monetization mechanism: AdWords, released in 2000, 4 years before the IPO. It was easy to see how it performs financially and why it might skyrocket. Can someone enlighten me how Twitter might earn some steady money?
    • olefoo 13y ago
      Yes. Think about all of the paywalled news outlets out there. Think about how many journalists tweet their stories to drive their personal brand. Think about immensely popular twitter accounts and sought after domain experts. Think about the fact that someone who is very entertaining on twitter needs to leave twitter to ( consult, sell t-shirts, produce media, etc. ) if they want to make money. Think about how t.co makes it possible for them to track url usage attributable to them. Remember when micropayments for media was a buzzword? If you still don't get why twitter might be undervalued. I would be happy to to explain it to you with, charts, graphs and a full research report; for a fee.
      • silverbax88 13y ago
        I don't want to sound dismissive, but this is very similar to the 'eyeballs' strategies that were bandied about prior to 2000. If a million people use a link to go to a paywall site, that's awesome - except as of now the data shows that Twitter users don't become buyers as a general rule. Can they make money? Sure. Can they make money with ads? Sure. Can they make money with massive vertical media funnels? Well...what will make them more successful than Apple, Google, Microsoft and TimeWarner who have all been trying to do the same exact thing for many years? Not saying they won't...just saying I'd like to see some track record before I buy into an idea that no one has been able to make work yet.
• slapshot 13y ago
  The banks sold at $26 to their institutional clients ("building the book"). The banks didn't hold the stock at $26 themselves.
  • abat 13y ago
    But the banks also got an option to buy an additional 10M shares at $26 in the next 30 days. By keeping the price low, the banks made a $500M profit on top of their fees. The banks are triple dipping on the IPO: the fee (3.25%), their options on 10M shares, and their ability to limit IPO access to clients that give them profitable business. That said Twitter extracted some sweetheart loans from their underwriters and the fee is much lower than the usual 7%, so it's definitely a two way game where both sides are trying to take advantage of the other.
• dev_jim 13y ago
  How does Wall St always seem to end up with the blame on these threads? They priced the Facebook IPO too high and they get the blame, they priced the Twitter IPO too low and they get the blame. The company just went public and raised $2B+ at a higher valuation initial valuation then anyone expected. IPOs are tricky things to get right. Give it a few months for the hype to settle down before you start screaming about "joe public".
  • nonchalance 13y ago
    WS is the ticketmaster of the financial world: public companies, private corporations, startups, VCs, angel investors, investment firms, hedge funds, and HNWIs all blame wall street for some reason, yet they thrive on the services WS provide (and depend on the money made available by WS)
  • greeneggs 13y ago
    I am not an expert, but it seems like there should be a better IPO mechanism that sets the price just right. Why not have an auction?
    • wrice314 13y ago
      Pricing an IPO is more or less an auction. When pricing an IPO they set a range and then meet with institutional investors to sell their book (in this case 70M shares. The original price was 17-20 per share, and there was excess demand at this price, so the bankers and company, pushed the price to $26 per share.
  • ryguytilidie 13y ago
    Yeah how could people distrust banks after they've shown to be so completely trustworthy and transparent recently...?
    • onebaddude 13y ago
      And the SV/VC/Tech startup culture is just brimming with altruistic, wonderful people? Sociopathy isn't restricted to finance. Silicon Valley has seen its share.
• jonknee 13y ago
  Only a small percentage of TWTR shares were up for sale in the IPO--there are 544.70M total shares and just 70M were part of the IPO (a little less than 13%). Unless I missed something the shares sold in the IPO were issued, so for example if you were a VC with a million shares of TWTR you would still have a million shares of TWTR (now valued at $45M). The money from the sale will go to Twitter, not an investor. Twitter did "leave money on the table", but their #1 goal was not to pull a Facebook and have the IPO be DOA.
  • corford 13y ago
    Ahh now that's the sort of info I was hoping someone would reply with. So the shares that made up the IPO offering came from newly issued stock, not from existing share holders? That makes it all a bit less cynical to me since all it means now is that the investors are worth more on paper. They still have to actually sell some of their shares at some point to realise any profit and presumably it's not easy for them to sell large quantities quickly (i.e. they're in this for the longish haul and thus far haven't covered their losses to date with actual bankable money)? Would have been better in my book if they'd have waited until twitter at least turned a profit before going for the IPO but then I guess why wait if you're only plausible exit is IPOing and the banks are telling you the market will support it.
    • pbreit 13y ago
      "Insider" selling in the IPO is rare (Facebook was an exception). Insiders typically must wait for a secondary or the 180 day lockup during which the company must demonstrate in a more public way how it behaves.
• pbreit 13y ago
  Hard to determine which part your most concerned about. When $25b of wealth is being created, there are going to be some folks making money. And you might not think some of those folks earned their take. First, you're too fixated on "loss-making". IPO companies are almost by definition loss-making. IPOs are fundraising events. Growth companies use money to invest in the business for growth, not profits (yet). Second, it's rare for early investors to cash out on the IPO (Facebook was an exception). Instead, they usually wait for a secondary or for the lockup expiration. Third, yes, there is frequently an artificial "pop" on the day of the IPO because of the pent-up demand but that usually tempers quickly. Investors should definitely be careful and know what they are getting into. If they bought into Yelp, LinkedIn or even Facebook at the popped price and hung on as long term (read: every) investors should, they are doing fine. Fourth, yeah, the investment banks get to dole out typically underpriced shares to their top clients. Get over it. Fifth, the banks do take on some risks. Facebook IPO presented the banks with considerable risk of loss depending on when the banks were able to unwind their positions. Sixth, the pre-IPO market has evolved such that a lot of people who want in are getting in prior to the IPO. Feeling cynical might be fun but isn't very attractive or lucrative.
  • bolder88 13y ago
    > When $25b of wealth is being created Woah there. I think this is the fundamental issue. $25b of wealth hasn't been created. It's not free money. It's a scam.
    • lowboy 13y ago
      I think you have different requirements on what constitutes "wealth".
      • bolder88 13y ago
        If you print some more money is that wealth?
        • lowboy 13y ago
• ChuckMcM 13y ago
  I think you fundamentally misunderstand the process but that is ok, its not all that straight forward. The transaction here is between risk takers (venture capitalists and investment banks) and risk pricers (people who buy stock). Nobody is getting "ripped off" as long as everyone is following the rules set down by the SEC. Investors put money at risk. You know that because you've been here on HN a couple of years and no doubt read the <foo> is shutting down. stories. For each of those there is usually one or more investors who have put in thousands if not millions of dollars who get anywhere from $0 to some fraction of their investment back. Sometimes, their investment 'bet' pays off and they get back multiple times their investment. The trick is you blend all of those $0 and multi-X returns and you get their "effective" return. "Joe Public" and by that I assume you mean an unsophisticated retail investor (they aren't investing anyone's money but their own). Can achieve a similar result by buying "shares" in a fund managed by a banker. When folks ask me where I would put some extra savings I tell them I've been very pleased with the Vanguard funds. You make more than then .8% return that a Bank savings account pays, and your risk is relatively moderate (but if it is not zero like it is with the savings account). But this unsophisticated person should never be investing in an IPO stock. The professional managers who invest in an IPO stock may have hundreds of millions of dollars under management. They spread some of those over a number of IPOs as a way to provide 'long kicks' (which is that the stock is held for a long time and the success provides a large return many years later). Clearly they aren't putting their kids college fund in there. And most of the other dollars in their fund are on much 'safer' sorts of things, like Coca Cola or Alcoa. So this is the 'cycle of life' for many new tech companies, and if these investors in Twitter do well their Venture Funds will have a reasonable rate of return, and more rich people will give them some of their 'excess' funds to invest in other tech companies, and you and I can go get some of that by pitching them a great team and a great idea. So for the 11 times smart people came to them and they gave them millions and got nothing back, this 12th time they got a lot back. Nobody gets hurt as long as the people who don't know what they are doing stay out of the game. That didn't happen in the late 90's lets hope it doesn't happen again.
  • corford 13y ago
    Thanks Chuck for the thoughtful reply. If anything, I think I need to direct my negativity towards the public stocks and shares system as whole (i.e. it just appears to boil down to a numbers and sentiment game that doesn't seem to be a rational way to determine a company's "real" value at any given point in time) rather than looking for cynical players ripping people off. Looking at it another way: the whole thing is intrinsically speculative. Starting a company is speculative, investing in a company early on is speculative, IPOing is speculative, buying publicly traded shares is speculative. It's all speculation in a never ending quest to divine what a company's (or idea's) true value is. The more I go down the rabbit hole trying to think about and understand all of this, the more I find myself ending up here: http://en.wikipedia.org/wiki/Wikipedia:Getting_to_Philosophy http://en.wikipedia.org/wiki/Wikipedia:Getting_to_Philosophy :D
• fest 13y ago
  I have a similiar thought I always return to when I read news about big IPOs- what (if any) value is added by stock exchanges? The only thing I see is the ability to use stocks as long-term storage for excess money. * After the IPO, money made by circulating stocks is of no benefit to company in question. * Companies rarely pay out dividends (I usually see that in news, as if it was something special)- so buying stock in hopes of dividends does not seem a good idea. * Publicly traded companies are then put under pressure to meet arbitrary analysts' expectations by majority shareholder(s)- which does little to help company meet it's long term goals. None of this seems to create any value for anyone except stock exchange. So isn't stock trading just a legal way to gamble? I can easily see the value added by banks (handling money transfers so we don't have to deal in cash, trading foreign currency when I need it, etc). Traditional investment is also (meant to be) of benefit for both parties- people with excess money can help fund businesses, which then in turn pay them back from their proceeds. There sure needs to be something I am missing in the stock trading (the question being- what exactly?)
• mathattack 13y ago
  On Edit 2 - The banks don't double their money on large bets. They make smaller risk free sums. The banks are generally paid a certain % of the deal size, and are expected to make markets in the stock. Most of the people who bought at $26 and flipped at $40 or $45 were individual customers of the banks. These could be retail investors, but they were largely institutional. Generally institutional funds that do IPOs aren't flippers (investors prefer stable capital, so banks don't allocate as much to hedge funds) but they were the ones who had the shares. Net - the banks weren't the ones getting rich from flipping, their customers were.