A few friends of mine in California calling themselves “Twitter“ asked me if I want to buy 70 million of their shares at 26 $ a pop. I did a quick calculation and noticed that I don’t have enough money. Because of this, they are now having a yard sale which they call “IPO” for some inexplicable reason.
It may not be nice of me to tell you this behind my friends’ back, but I warn you: Don’t buy Twitter shares! They are a bad investment.
- Twitter doesn’t produce or sell anything that people need. Who needs a website or service where friends tell me how hungover they are, newspapers write what I already read in the morning paper and people try to show off photos of their ugly babies? Nobody needs that.
- “But,” I hear you say “Twitter has 200 million daily users. That shows how popular they are.” Sure. But these users don’t pay anything. It’s like these free newspapers you get in the Metro or like porn websites: you use them because they are for free, but you would never pay for them.
- Also, this number of users should be taken with a large barrel of salt. After refusing to get a Twitter for a long time, I finally signed up and I am now on Twitter myself. But that doesn’t mean that I use it every day or that I take it seriously. If I had to drop one of the social media services I am using, Twitter would be the first to go. It is the least useful one and it’s main purpose is killing time while on the phone with my Mom. That’s hardly a business model worth billions of dollars.
- What is more: Twitter will never be able to charge its users. Unlike quality publications like the New York Times or this blog who can switch from a free provision of services to a paywall model, nobody will pay for Twitter because it’s not unique. If Twitter started charging users, most of them would leave right away. And I bet that within a week, somebody else will have set up a site where you can upload short messages for others to read. It’s not a hard thing to copy really.
- The only way Twitter actually earns revenue is advertising (unless they also sell your personal data like other social media companies), but I doubt this business model will work. Online ads work well for Google because I use a search engine to search for stuff. If I look for dentists, it makes sense if some ads for local dentists appear. But Twitter is not used for searches, and thus advertising will not be considered as useful.
- The reliance on advertising revenue also means that the only way to increase revenue is to put up more ads. Doing this would annoy users and drive them away.
- Online hypes come fast, but they also die fast. I remember when a few years ago everybody was hyped up about “Second Life”. I never got around to having a look at it, and by now I think it is dead.
- Ask Rupert Murdoch about his investment in MySpace or the people who bought shares in GroupOn.
- Last month, Twitter announced its most recent financial data: in the 3rd quarter it had doubled its revenues (to 168 million $). In the same time, it managed to triple its losses to 64 million $. – Seriously, if I came to you asking for money for a business whose losses were rising faster than the revenues and which had never made a profit, you’d think I was insane. But if you invested money in such a business, you’d be insane too.
Having said that, if you manage to get some shares in the IPO, you may be able to make a quick buck: on 4 October 2013, shares of Tweeter, a retail chain which had gone bankrupt in 2007 but whose shares were still being traded at rock-bottom prices, shot up by 1,500% in the aftermath of Twitter’s IPO announcement. Apparently, investors had confused the two companies and hadn’t realized that Twitter had not yet gone public and that it would probably not go public with penny stocks. So much for the rationality of the markets.