I’ve been complaining for a few weeks now about the taxpayer rip off that was the Royal Mail initial public offering (IPO). But the post-listing leap in Twitter shares put that investment-banker miscalculation rather in the shade.
The micro-blogging site (much used by Moneyweek writers) saw its share price rise by some 80% as soon as it made its debut. They started the day at $26 each and ended it at $44.90. Twitter has raised nearly $2bn, but it is worth a whopping $30bn. So what next?
It is almost impossible to say. We all like Twitter – it is so useful that we might even be prepared to pay to use it. But whatever the metric or valuation technique you might use to look at the stock, it is far too expensive for anyone who considers themselves an investor rather than a speculator to look at buying.
It has never turned a profit. It doesn’t expect to until 2015. Revenues are rising (up 106% last year to $422.2m), but current losses are running at over $134m a year.
The good news is that on that kind of losses, the newly raised money will last a while. The bad new is paying tens of billions for a company with revenues only in the hundreds of millions seems a bit silly, or as The Times puts it, “deranged”.
Maybe it will turn out to be worth that one day. Maybe it won’t. That depends on how Twitter finds a way to make people pay to use it (via looking at ads one way or another), and how many people end up doing that. There are no forecasts for that, just different levels of bad guesses.
Howard Marks of Oaktree reckons that the people buying the shares have no idea how shares are or should be valued. Instead, they are just “buying it as a punt”. That in itself should make us cautious.
But it also puts Marks in mind of a piece he wrote back in February 2007 (“The Race to the Bottom”), in which he noted that “people engage in aggressive behaviour when they are unafraid”.People being unafraid in markets is not a good sign, and he fears that the Twitter listing will be one sign that the “race to the bottom has resumed”.
Marks’ conclusion back then? “If you refuse to fall into line in carefree markets like today’s, it’s likely that, for a while, you’ll (a) lag in terms of return, and (b) look like an old fogey. But neither of those is much of a price to pay if it means keeping your head (and capital) when others eventually lose theirs. In my experience, times of laxness have always been followed eventually by corrections in which penalties are imposed. It may not happen this time, but I’ll take that risk.”
And a quote from his most recent note to his shareholders: “The greatest of all investment adages states that ‘what the wise man does in the beginning, the fool does in the end’. The wise man invested aggressively in late 2008 and early 2009. I believe only the fool is doing so now”.