The social media company has struggled to justify its lofty valuation ever since it came to the stock market in 2013, says Questor
Twitter [NYSE:TWTR] shares have sunk to their lowest level on record this week as investors continue to lose patience with the social networking site and its struggles to justify an eye-watering valuation.
= Growth slows =
The social network that allows users to send messages (and pictures) using less than 140 characters saw its shares slide 4pc to $23.95 (£16) in New (KOSDAQ: 160550.KQ - news) York on Tuesday. The stock has now fallen below its $26 initial public offering price from November 2013 and is significantly below the $40 at which UK investors got the opportunity to buy the shares on the first day’s trading.
Investors have become increasingly concerned that the growth rate of users has stagnated and are unclear how the company will navigate its way to a profitable future.
The pace of growth has hit a brick wall with the company reporting 320m users in the third quarter, up just 1.3pc on the previous quarter, and 11pc higher year-on-year. The number of people using the service also leaves the group looking like a minnow compared to Facebook’s billion and a half users.
= Identity crisis =
Technology companies have to move forward or they will grind to a failing standstill, and the slowdown at Twitter has thrown the group into paroxysms of crisis. Dick Costolo quit as chief executive in June and the company announced it would be sacking 336, or 8pc, of its 4,100 strong workforce in October.
Jack Dorsey the co-founder has installed himself as chief executive and the site launched a new feature called “Moments” this week which aggregates a selection of the “best” posts of the day. However, it has done little to arrest the decline in the share price.
Investing in social media platforms is very high risk due to the low barriers to entry. All the spending on technology can very quickly be made worthless by the arrival on the block of a rival new social media platform. Twitter itself, it should be remembered, was only started in 2006.
Social media platforms exist in a fickle, fast-moving landscape. But, while Facebook (NasdaqGS: FB - news) is showing signs of generating stable revenues from its user base, for every success there are failures such as Myspace and Bebo.
More than a decade on from the dotcom boom and bust it appears that equity investors are still struggling to separate hype from underlying valuation when it comes to shares in technology stocks. Twitter is a fantastic information service, but its ability to generate after-tax profits over the long term is still unsure.
The majority of the costs that have pushed the company into a loss are related to share options. As Twitter expanded, it paid staff and customers with the promise of shares. But, now that the value of those shares has soared, they are adversely have an impact on the company’s profits as they are paid out.
We warned investors at the time of the IPO to avoid Twitter shares due to the risks. We repeated those warnings when we thought investors should sell the shares at $52 . Those that followed the advice would have saved themselves from painful losses.
More than a two years on from the flotation, the company is still grappling with how it will generate meaningful profits in the future and for that reason we repeat the warnings to stay away from the shares.
UK investors still determined to buy into Twitter can purchase shares as most British stockbrokers deal in American companies, although you must fill in a W-8BEN tax form first. Alternatively, they can bet on the shares’ price movements through spread-betters (Other OTC: UBGXF - news) .