Business Matters: Twitter Shares Soar, But Is It All Hype — Or the Next Friendster?

Twitter's debut on the New York Stock Exchange was so successful that "bubble" was a commonly heard word on Thursday. The closing price of $44.90, about even with the opening price of $45.10 but below the day's high of $50.90, gives the micro-blogging service a market valuation of $25.13 billion. If that number seems astronomically high, consider the service may be losing momentum with its younger users and, unlike Facebook when it went public, hasn't yet turned a profit.
 
A $25 billion valuation puts Twitter well above many content companies. The New York Times Company is worth only $1.9 billion. Twitter's $25 billion is not in the league of Comcast, currently valued at $124 billion, but far exceeds Netflix's current $19.4 billion market capitalization. And, for some music industry perspective, $25 billion could buy Universal Music Group, Sony Music Entertainment and Warner Music Group and a portion of Live Nation. 

Business Matters: Signs That Teen Interest in Facebook Is Fading

Whether or not a large social media company posts a net profit is almost immaterial here -- especially if we're in the midst of a tech bubble. Twitter is being valued based on expectations it will (a) continue to grow, (b) continue to engage its users and (c) offer attractive, productive advertising products that generate substantial revenue. Its business model certainly isn't hurt by the fact it doesn't pay its users for their content. Musicians, movie stars, sports figures, news organizations and other entities help make Twitter valuable but get only promotion in return.
 
One possible needle for Twitter's bubble are the questions about its ability to engage. The latest bi-annual teen survey from PiperJaffray shows legacy social media services like Facebook and Twitter lack the momentum of newer services such as Instagram. The survey revealed that Instagram, the Facebook-owned photo-sharing service, climbed to 23% from 12% last fall. Twitter surpassed Facebook as teen's favorite social media service for the first time but fell to 26% from 27% of teens surveyed. The percent of teens that favor Facebook dropped to 23% from 42% just a year ago. The moral of the story: attention spans are short and switching costs are not insurmountable.
 
The size of Twitter's user base has drawn scrutiny in recent weeks. The company revealed in its IPO filings with the SEC it had 232 million active users -- 53 million of them in the United States -- as of September 30th. Although that figure had increased 39% from 167 million over the previous 12 months, it's far below some other web services: Facebook has 1.2 billion monthly users and Google+ is at 340 million and growing.
 
Twitter's $25 billion valuation won't last long if users flee to other services or growth doesn't meet expectations. Social media is fluid. What's popular and seemingly essential one year can fall out of favor. That shift is already being seen at Facebook, which admitted during its latest earnings call it experienced a decrease in teen daily users last quarter. There's little reason to believe Twitter will flame out a la Friendster or Myspace, but expect Twitter to face strong competition from existing social media services and some that haven't even launched yet. 
 
The $25 billion valuation could evaporate because of larger market forces. Numerous experts and commentators believe the equities are overvalued and the markets are in the midst of yet another bubble. The head of equity strategy at Saxo Bank says Twitter's IPO represents the "ridiculous" nature of current equity markets. Forbes believes Twitter and other social media companies (Facebook, LinkedIn) are overvalued and will "plunge dramatically, along with a mass wave of tech startup failures." As Business Insider points out in a detailed argument for a stock market bubble, interest rates are low, stock markets are reaching all-time highs and tech companies are, in many ways, behaving like they did in 1999.
 
Little of this really matters unless you bought Twitter stock today (except for the warnings of a pending stock market collapse, of course). Some people may shift to other social media services. Twitter's share price may plummet and cause it to double its efforts to launch effective advertising products. But Twitter will continue to operate just as it did before its IPO. And you, your company and your artists will continue to use it

 

*Correction Appended: The original version of this story erroneously included a sentence that Twitter's $25 billion valuation is more than "News Corp, a media giant that includes the Fox Entertainment Group and publisher HarperCollins, has a market valuation of $10 billion." However, News Corp split into two separate entities earlier this year to become News Corp and Twenty-First Century Fox. News Corp is valued at $10 billion; 21st Century Fox, the TV and cable business, is worth $76 billion.