For those of us whose first experience of extraordinary stock-market delusions was the dot.com bubble at the end of the 1990s, the past few weeks have felt quite like the old days.
In separate announcements, Facebook and Twitter have shown, first, why investors are once again falling in love with new technology and, second, the significant risks of doing so.
Facebook celebrated its tenth anniversary this month just days after trouncing growth expectations. The devourer of my teenage children’s spare time announced revenues up 76 per cent and earnings 82 per cent higher. It added US$16bn to its market capitalisation, which now stands at around 100 times annual profits.
Facebook has defied the sceptics who said it would go the way of MySpace and Bebo. They said it couldn’t follow its users from their desktops to their smartphones; but more than half of its revenues now come from mobile ads. Not even the arrival of the parents has yet delivered the kiss of death – a billion and a quarter users create a powerful network effect even if one of them is your mum.
After a disastrous market debut, when Facebook’s shares lost half of their value within months of floating, it has trebled again.
Twitter contrast
The contrast provided by Twitter last week could not have been starker. Facebook is proof that some of the blue-sky hopes of 1999 were right but 10 years too soon. Twitter is a reminder that sharing some features with the market leader is not the same as being one.
Prior to Twitter’s first quarterly results announcement, investors were happy to sprinkle Facebook’s stardust on its younger rival. Twitter’s shares rose 6 per cent the day after Facebook announced its results. But then they were reminded that Twitter remains an early-stage experiment masquerading as a multi-billion dollar quoted company.
When your shares have risen 150 per cent in the three months since you came to market, when they are valued at 30 times, not earnings (there are none) but, sales, you are standing on a precipice. In the week ended February 7, Twitter fell over the edge, losing a fifth of its value – $US6bn – in the time it takes to tap out 140 characters and a hashtag.
The proximate reason for the fall was disappointment at Twitter’s growth in user numbers – 4 per cent, the same as Facebook’s but from a much lower base – and a decline in timeline views, the number of times users look at or refresh the stream of tweets from the people they follow.
Mainstream or niche?
Suddenly, people have started to question whether Twitter can ever go mainstream in the way that Facebook has. Will it ever be more than a niche player, beloved of news junkies and celebrity stalkers but not the must-have daily link to our virtual lives that Facebook has become?
There are several problems with the likes of Facebook and Twitter as investments. The first is the largely discretionary nature of the activity they depend on. Warren Buffett invested in Gillette because clean-shaven men use their products every day, are largely indifferent to the price they sell for and are loyal to a powerful, established brand. Facebook partly passes this test but Twitter certainly does not. If my tweeting habit stopped today it really wouldn’t make a material difference to my life.
Too unreliable
Second, I don’t like the all-or-nothing nature of the bet social media demands of an investor. If Facebook or Twitter start to be perceived as uncool, they won’t decline slowly they will implode. That makes the quality of their earnings (sorry, losses in the case of Twitter) too unreliable for my taste.
Certainly it makes them too unreliable to justify 1999-style multiples of earnings or sales. The biggest determinant of future returns from any investment is the price you pay at the outset. For a small number of survivors from the first dot.com gold rush it made sense to suspend judgement and pay any price. For the vast majority it did not and this time around will be no different. For every Amazon there will be a hundred Last-minutes.
The mistake we all made last time around was to believe that the winners from the technology boom would be new companies. The reality of the first phase of the internet was that existing companies and dominant brands used the new technology to become even more entrenched in their market leadership.
Taking advantage of that as an investor requires lateral thinking and the discipline to avoid jumping on the latest bandwagon.
