Twitter's sputtering user growth unnerves investors

http://www.reuters.com/article/2014/02/05/twitter-results-idUSL2N0LA1ZX20140205

by blo • 12 years ago

67 48 12 years ago

Cookingboy2• 12 years ago

I used to think Wall Street is very evil at sucking up the wealth of the rest of the country to line up the pockets of themselves while creating no real value. Nowadays I am pondering whether Silicon Valley is guilty of similar practices.

We see companies like Twitter, Salesforce, Netflix, etc goes IPO and commands a ridiculous valuation while having paltry profit/revenue under the name of "growth stocks", while suburban moms in mid-west buy those stocks up because they read about them on CNBC.

Then the founders/VCs cash out big time and then use the money to prop up the next series of startups, then rinse wash repeat. How much of this is sustainable? Maybe once in a blue moon a company with P/E of 500 is justified because they MAY be the next Google or Apple or Microsoft (ironically, none of those companies ever traded at that kind of P/E themselves, oh my..the days of only taking your company public AFTER you started making tons of money...), but these days when that kind of growth expectation is the norm then obviously most of them are in for a big crash in the future, since we aren't going to have a "next Google" every 6 months.

I wonder if this bubble will deflate slowly or crash and burn like it did back in early 2000s.

Sigh...I'm in my mid-20s and I actually work in SV but I already sound like a old geezer when talking to some of my peers about the tech industry's near term prospects.

kllrnohj• 12 years ago

Maybe once in a blue moon a company with P/E of 500 is justified because they MAY be the next Google or Apple or Microsoft

Well, in this case a P/E of 500 would already be a massive improvement. Twitter currently has a negative EPS (aka, no profits at all), so it doesn't even HAVE a P/E.

I wonder if this bubble will deflate slowly or crash and burn like it did back in early 2000s.

Crash, probably, but not like in the early 2000s. The key difference now is that the internet is established and has multiple viable business models. Netflix has a P/E of 200, it wouldn't be surprising to see its stock price plummet from $400 to $40 (where it would then have a more sustainable ~20 P/E). But that won't change that the company is actually making money and has a profitable business model.

However that doesn't help the various startups and such that don't have viable business models, like Twitter which just keeps bleeding money with no sign of stopping.

justin66• 12 years ago

Your comment actually demonstrates why P/E is at times kind of a dodgy metric. Do you know what will happen the minute any company (not just Twitter) which aspires to go from unprofitable to profitable changes from not having any earnings to having earnings? HUGE P/E. It's like that when you barely have any earnings, but that is not necessarily a an indication of profound overpricing.

NTDF9• 12 years ago

I hear ya. This is called the Greater Fool theory.

VCs know this. That's the reason they hype startups and ask young folks to "drop out and startup'. They are bound to make money somewhere (1 in 10 startups that IPOed big). Silicon valley is a big money sucking machine.

Btw, the Wall Street firms involved in underwriting the IPO already made a ton of money. The remaining guys fought over scraps and are making money now by strategic shorts and selling existing stocks to a greater fool.

It's quite pathetic really. "Changing the world" is quite possibly the last thing most startups are doing.

I thought twitter played a role in Arab Spring. They are a good company with a niche global impact. But they definitely did not command such a big IPO IMHO.

Of course I'm saying all this retrospectively. I don't have a time machine.

pdq2• 12 years ago

This is the so-called "Greater Fool Theory": https://en.wikipedia.org/wiki/Greater_fool_theory

Many of the VCs get in on the A-round, pump it up to the next VCs for the B-round, pump it up get it to IPO, and then they have their liquidity event where everyone cashes out.

The biggest thing that irks me is tech companies reporting non-GAAP numbers as their top-line results on earnings reports. These are baked-up numbers to make companies' large losses (or possibly small profits) look deceptively better than they actually are.

minimax4• 12 years ago

FWIW Twitter lists GAAP numbers above non-GAAP. They're also pretty up front about the fact that the discrepancy between GAAP and non-GAAP is stock-based compensation.

https://investor.twitterinc.com/releasedetail.cfm?ReleaseID=...

debt• 12 years ago

I think what we'll see in the future is the correcting of a few of these IPOs; none of these companies will go bankrupt though and bust completely. As mobile usage starts to thin out across all platforms(fb, goos, apple, etc.), overall growth will slow; we're seeing signs of that already.

Basically mobile usage will plateau and the market will correct itself in response. I'd say these companies will get a boost from international but it seems emerging markets are growing much more slowly than anticipated.

ulfw• 12 years ago

It's all part of the bubble that surely will pop eventually. It's not as heated as back in 2000 and the fundamentals are somewhat more sound, but it's still cooking and cooking and eventually it'll be too much. (see SV backslash, unaffordable rents and living expenses, etc).

sz4kerto• 12 years ago

"Maybe once in a blue moon a company with P/E of 500 is justified because they MAY be the next Google or Apple or Microsoft"

What about a company with a size of $100Bs and PE of 500? :) Everybody knows who I'm thinking of ...

sheetjs2• 12 years ago

Companies can "grow" into the valuation by actually making more money (enough to justify the market cap), which is what many people believe will happen with Amazon

As for parent comment regarding WS / SV, I see WS as the TicketMaster of the business world: they end up taking the flak for all of the various practices, when in fact other entities (like VC firms) are also pushing for the IPOs and other questionable practices

Cookingboy2• 12 years ago

Haha, although I do believe in Jeff Bezo and Amazon's vision, the current valuation is very high. I can see Amazon one day reaching Google's current profitability, but there is no way the P/E ratio would maintain close to what it is now (other wise Amazon would be worth about 10 TRILLION dollars). So the effect is that even if Amazon is tremendously successful in the future, the stock will probably experience a period of "relative stagnation" as the value of the company catches up to the tremendous valuation, then gradually grows proportionally with the profitability of the company.

gfodor• 12 years ago

amazon's valuation should be viewed through P/FCF not P/E. Bezos plows everything back into the company, they have plenty of free cash flow.

dredmorbius4• 12 years ago

Nowadays I am pondering whether Silicon Valley is guilty of similar practices.

Read up on John Michael Greer's concept of "catabolic collapse": http://ecoshock.org/transcripts/greer_on_collapse.pdf

I find a great deal of parallelism between Greer's observations and Marc Andreesen's "Software is eating everything". The two great economic sectors of the past 20 years in the US have been the FIRE industries (finance, insurance, and real estate), and software / IT.

Broadly speaking, a society facing the end of an anabolic [growth] cycle faces a choice between two strategies. One strategy is to move toward a steady state in which C(p) = M(p), and d(R) = r(R) for every economically significant resource. Barring the presence of environmental limits, this requires social controls to keep capital stocks down to a level at which maintenance costs can be met from current production, and maintain intake of resources at or below replenishment rates. This can require difficult collective choices, but as long as resource availability remains stable, controls on capital growth stay in place, and the society escapes major exogenous crises, this strategy can be pursued indefinitely.

The alternative is to attempt to prolong the anabolic cycle through efforts to accelerate intake of resources through military conquest, new technology, or other means. Since increasing production increases W(p) and increasing capital stocks lead to increased W(c), however, such efforts drive further increases in M(p). A society that attempts to maintain an anabolic cycle indefinitely must therefore expand its use of resources at an ever-increasing rate to keep C(p) from dropping below M(p). Since this exacerbates problems with depletion, as discussed above, this strategy may prove counterproductive.

Yes, software provides efficiencies, and some of the recent chain of startups (Google, Twitter, Facebook) have succeeded in ephemeralizing knowledge, communications, and networking in ways which, to an extent, increase social interaction, but they're doing so at the cost of a highly confounded signal/noise ratio, and with significant externalities.

Then there's the whole "moving financial capital around" aspect of tech funding and investment, which I'm coming to increasingly question. I don't find it particularly productive. The number of firms whose exit strategy is "get bought by Google / Facebook / Apple" reminds me strongly of the late 1990s "get bought by VA Linux" (remember them?).

And for perspective, I'm in my mid 40s and have seen a few cycles so far.

valas• 12 years ago

What does it mean "confounded signal/noise ratio"?

hnnewguy• 12 years ago

sucking up the wealth of the rest of the country to line up the pockets of themselves while creating no real value.

Genuinely curious where you draw the line between "wall street" and the "rest of the country", especially with regards to creating "no real value".

I'm sure the vast majority of posters here have a car loan, student loan, or mortgage, which is just one example of where your pejorative use of "wall street" generates value.

As you say, "SV" (or the tech world in general) may be far more guilty of sucking wealth with no real value added.

ams6110• 12 years ago

As an aside, "suburban moms" and indeed almost all individual investors should not be buying individual stocks. Buy index funds.

ericd• 12 years ago

Why not? Some people like taking risks in exchange for potentially much higher rewards. I have Vanguard funds as the basis of my retirement savings, but I've consistently done much better than the average while investing in individual stocks.

patio112• 12 years ago

If you think it's an absolutely sure thing that Twitter will lose money, there exist a variety of options to be compensated for providing your expert opinion to the market.

I did pretty well selling call spreads on Twitter. Sadly, I also had the same thesis for Yelp and Zynga.

fchollet• 12 years ago

I attempted to short TWTR today before the earnings, as a big gap down was absolutely predictable. I couldn't: my broker didn't have any shares. It's a security that is very difficult to borrow, due to extremely high short interest --in fact it has been the case pretty much since the IPO.

There might exist mechanisms, whether you can actually use them is another question.

AznHisoka• 12 years ago

Actually, he would have to believe that other people believe that Twitter will lose money, as stock prices go up/down based on expectations. That's how convoluted the stock market is :(

rayiner• 12 years ago

Silicon valley is just an extension of Wall Street. Where do you think VC's come from? The vast majority have investment banking backgrounds. I don't say that as a pejorative: I think Wall Street is quite valuable. However, it is prone to encouraging churn for the sake of it, and that carries over to Silicon Valley.

itchitawa• 12 years ago

"suburban moms in mid-west buy those stocks" There's no need to blame. Those investors are trying to make free money without doing productive work or even investing in productive companies. They're also the ones who lose the most if it fails so they automatically experience the rewards or blame financially.

dangerlibrary• 12 years ago

Re: slower user growth - I wonder how much longer it's taking new twitter bots to find unused handles...

dredmorbius4• 12 years ago

Reuters link as Yahoo tends to evaporate its articles:

http://www.reuters.com/article/2014/02/05/twitter-results-id...

orthecreedence• 12 years ago

"Twitter investors disappointed by reality that growth cannot be infinite"

Touche• 12 years ago

Twitter has never made a compelling case for "regular people". The reality is that if you don't have a lot of followers the experience on Twitter isn't very compelling. You see lots of tweets from celebrities you follow but you don't see everything because the stream passes too quickly. You never tweet yourself because on the few occassions you did no one responded (you have 50 followers who either don't use the service often or when they do have the same stream overflow problem you have).

Twitter should seriously consider making people you interact with get precedent in the timeline. That would allow you to see tweets from people you know IRL easier and make interaction more common.

electic• 12 years ago

I wonder how much of this is a direct result of the destruction of Twitter's once vibrant app ecosystem. We have seen platforms that do this, time and time again, sputter and die. Platforms, such as iOS, who embrace developers thrive and grow to nice levels.

taterbase• 12 years ago

I can't help but agree. What made twitter so interesting and fun initially was how it was so easy to integrate with everything. It became a widely used messaging/information platform for apps to take advantage of while also allowing other devs to build their own spin on what a Twitter app should look and feel like.

I really think Twitter could have been better off by selling developer access to the pipes. Charge by the user or by the api call. Some way to still encourage the 3rd party platforms while also seeing some monetary benefit from it.

rurounijones• 12 years ago

"* Twitter one of Internet sector's most highly valued stocks (Adds analysts' comments, share action, earnings details)"

Methinks they forgot to finish that bit

Twitter's sputtering user growth unnerves investors

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