On the same day, Securities and Exchange Commission Chairman May Jo White said, while not specifically mentioning Twitter, “Consider a company that correctly claims it has a hundred million users, and that the rate of user growth is expected to continue to grow at double digit rates. That certainly sounds good and it would seem to bode well for the prospects of the company – information that certainly could influence an investment decision. But what if only a fraction of those users are paying customers? What does that mean for future financial results? What if the bulk of the growth in the number of users is in an area where the company has not yet figured out how to turn those users into paying customers? What does that then say about the meaning of user growth rates?”
On Thursday, Twitter’s stock began trading at $46 (up 76% from Wednesday’s IPO price) and finished the week at $41. Because Twitter is not profitable, some investors use a price to sales ratio to compare its value to other internet firms.
On Friday, Twitter was valued at 44 times its revenue, while LinkedIn was 17, Facebook 17, Yelp 20, Pandora 8 and Google 6.
Highlighting the opportunities and challenges of momentum stock investing, Tesla Motors announced its quarterly earnings results last week. Since the beginning of 2013, the stock rose about 475% until September 30, and has since declined by about 30%. On Friday, Tesla Motors’ price to sales ratio was 9.5; Ford Motors was 0.4, General Motors 0.3 and Harley-Davidson 2.4.
- Regarding Twitter - its IPO provided a significant transfer of wealth to the firm and its investors and provides funding to build out its business franchise – likely through acquisitions. Significant work is needed to move the firm toward profitability and sustained growth.
- Regarding Tesla Motors – CEO Elon Musk is a leading industrial innovator and the firm’s electric cars are state-of-the-art. However, there are limits to maintaining the upward trajectory of momentum stocks. Factors influencing Tesla’s recent decline include: 1) its CEO’s said he thought the stock had become overvalued, 2) three Tesla Model S cars caught fire, although the customers may have be at fault and 3) constraints the firm is encountering as it expands its production capabilities.
- Bottom line – technology investing can be exciting, but momentum can move in both positive and negative directions.