Source: The Wall Street Journal
Twitter Inc.’s rise has been a remarkable story. Both because it was beset by chaos (see Nick Bilton’s new book for the operatic details) and because, despite the chaos, Twitter has somehow managed to become a legitimate, even straitlaced business, its IPO is a good time to congratulate the firm on its unlikely success.
But it isn’t a good time to invest in Twitter when it starts trading Thursday. Here are three reasons to sit this one out:
Don’t invest in individual stocks. Especially don’t invest in tech IPOs. This isn’t tech advice, just widely accepted financial wisdom for normal, non-professional, non-gambling investors: Buy index funds and forget about picking. And, really, it’s the first and the last reason for you to stay away from TWTR. If you’re no expert, don’t pit yourself against the experts.
Right now, there are hundreds of stock analysts, market researchers, advertising gurus and other people who are being paid vast sums to determine whether and how much to invest in Twitter. Going up against them is a loser’s game, and you shouldn’t play.
This is true of all stocks and isn’t specific to Twitter. But there’s a special danger in IPOs, especially big-name tech IPOs, which are governed more by mass hysteria than any kind of rational assessment of long-term potential.
If you think Twitter is going to be a successful company, that will be true three, six, and nine months from now, too. There’s no reason to join to the IPO bandwagon other than to indulge a day-trader’s fetish for a quick pop.
…But say you buck these warnings and are fine with gambling on individual stocks? Here are more reasons not to invest in Twitter specifically:
You don’t understand Twitter. Few people do, really. It’s telling that Twitter’s IPO roadshow video begins with three of its co-founders, Evan Williams, Jack Dorsey and Biz Stone, expressing slack-jawed awe at the company’s rise.
Twitter is such a simple product that nobody quite expected it to take off as it did, and the ways in which people began using it were so innovative that they constantly surprised even its creators. Indeed, many of Twitter’s signature functions, including @-replies and hashtags, were invented by users, not the company.
Twitter’s flexibility is what makes it so much fun. It’s also what makes it such an important social force: I’d argue that Twitter is changing how the world communicates—especially how we get our news—more deeply than any other social service. For instance, there’s pretty solid evidence that Twitter has radically transformed how the media cover presidential elections.
But from a business perspective, Twitter’s flexibility seems as much a blessing as a curse. Twitter is still a niche service, one experiencing solid but unspectacular user growth.
The optimistic take on its user base is that Twitter just hasn’t figured out a way to explain itself. As it sharpens its message to new users—see the “Discover Twitter” intro page it just launched— perhaps more people will realize that Twitter is right for them.
The pessimistic take is that, no matter how well it explains itself, Twitter just isn’t for everyone. Its unstructured, chaotic nature is simply not of mainstream appeal.
Here’s the trouble for any would-be investor: Nobody knows which of these takes is right, not even people who tweet all day, not even the folks who make Twitter. Whatever you think Twitter is, and whatever you think Twitter will be—it’s all just a guess.
Twitter’s place in the advertising business isn’t clear. In Web years Twitter isn’t a very young invention, but as a company, it is a late bloomer. Only relatively recently has it morphed into a well-functioning business based on a key advertising product, the Promoted Tweet.
So far, its advertising business has worked well. It has seen solid growth—the company’s revenues doubled over the last year—and because tweets are so short, Twitter is well positioned to take advantage of the rise of mobile devices. More than two-thirds of its advertising revenue now comes from mobile ads.
Yet its business is plagued by questions for which we have no answers just yet: Do Twitter’s ads “work”—do they reach enough people, do they alter purchase decisions, and are they becoming a standard part of advertisers’ media buys? Can Twitter’s business skyrocket if its user base doesn’t? Will it constantly find itself losing out on ad deals to its behemoth rivals?
I’ve heard from many in the advertising business who are quite optimistic that Twitter can become a key part of the way marketers’ target the Web. One of the more compelling arguments for Twitter’s ad business is that, because it doesn’t have the benefit of a billion users, it will be forced to come up with more creative ways of monetizing its users. In other words, Twitter’s size makes it hungrier than Facebook —and that hunger will inspire risky innovation. See Twitter’s decision to buy the mobile-ad company MoPub, which has been hailed as a way to create an advertising network that can track and target users as they flit from desktop to mobile devices, a feat that no other ad company does well at this point.
Honestly, I suspect there’s some truth to this; again and again in the tech industry, we’ve seen that size doesn’t necessarily lead to success, and sometimes it hinders it.
But that doesn’t change the fact that Twitter is a risk, a big one. If you bet on Twitter, you ought only go into it with the understanding that you don’t know what will become of the company. You’re walking into this deal nearly blind, because you have to, because Twitter is so young, so small, and so different that it’s hard to know what to make of it. Sometimes such investments turn out to be huge. Other times you reach for the Maalox. Good luck.