This post is biased towards opinions rather than facts.
Is Twitter a good company in a good business? Probably not.
Twitter faces significant competition for every single aspect of its business, including users, advertisers and personnel. Competitors include giants like Facebook, Google, LinkedIn, Microsoft and Yahoo!. Internationally, competition comes from smaller companies like Sino Weibo in China, LINE in Japan and Kakao in South Korea. While the former has money and clout, the latter has momentum and a comprehensive knowledge of the local markets. I cannot think of a fiercer and more global competition.
There are very few barriers to enter the industry. To create a startup, you don't really need a lot of capital, nor knowledge or network. All you need is an idea and some luck. Every year, hundreds of thousands of brilliant educated young people make the jump. That is a challenge unique to this one industry. Every one of the competitors aforementioned was once a startup. If we take into account the huge number of startups currently on the market, how many big players will there be in ten years, in twenty years? My guess, too many.
The competition of innovation and new products is huge. Once you are a big player, you are fragile. You dread change because there is too much to lose. Some companies that were once industry giants are now afraid of change. Think Yahoo!, IBM, Nokia, Blackberry, Microsoft. There must be half a dozen big changes every year in this industry and you cannot miss them. Once you miss a turn, you are dead. That seriously shortens the lifespan of your company.
The company has no leverage over its customers. First of all, let's make it clear, the customers are the advertisers, not the users. They are the ones paying money. They are the ones sales force and sales support staff focus on. Can Twitter ever have high margins? That is a legitimate question, and the answer is probably no. On-line advertisers choose Twitter because it is an effective way to touch millions of people from all demographics. So, unless Twitter manages to attract a uniquely huge and wide user base, it cannot make the advertisers pay more than the competition. Right now, Twitter products are not very differentiated from the rest of the pack.
The company has no leverage over its suppliers, meaning its users. Why do people go on Twitter? One of the reasons is because it is cool. So what do you do when it stops being cool? What do you do if the next big thing is to write long poems, or to send encrypted videos? Then you will have a choice. Either you change your paradigm and you stop being The Twitter, or you count the minutes until someone buys you out. I don't call that having leverage.
The industry is young and fragmented. Acquisitions at ridiculous multiples make it to the headlines every day. Snapchat just reportedly refused a billion dollars from Facebook. If you are a banker, deals are good news. If you are the owner of a business, they seldom are.
Until now, Twitter has managed to build a brand, attract users and advertisers, which really says something about the quality of the management. Still, it doesn't say much about the quality of the business. In the words of Buffet:
"I try to buy stock in businesses that are so wonderful that an idiot can run them. Because sooner or later, one will."
Twitter is not a business that can be run by an idiot.
Are Facebook, Google, and LinkedIn really competitors for Twitter? I'm not sure about that, since each of these firms serves a different service to the customers. The fact that they are all online or social networks does not necessarily make them competitors. Twitter's service is quite unique compared to other online businesses, just like LinkedIn has found a niche in the social network industry, so has Twitter.
That said, I would never ever even consider investing in Twitter, Facebook, or LinkedIn. It's like you say, any geeky kid can develop the 'next big thing' from his student dorm. Technology firms are a huge risk to invest in in my opinion. Also, the valuations on these new online firms are obviously ridiculous.
Some of my own thoughts on your analysis:
As youjustgotlittup mentioned above, not all internet/mobile companies are necessarily comps to each other. While at the end of the day, all the advertisement-dependent services are competing for the same ad spend dollars, each service is a bit unique in the level of information and the demographic they provide. Facebook, Line, Kakao and Sino Weibo I could see as comps, but others are a bit of a stretch. Although Twitter's S-1 filing does list all the companies you mention as competitors, I doubt very much that Twitter employees are up late at night wondering what Microsoft is up to. LinkedIn doesn't depend on advertisements as much as it depends on headhunters signing up for premium memberships. Google and Yahoo! are in the business of search (among other diversified services), and as we've seen, neither company has had much success with the more social segments of the industry.
While I understand you're trying to make the point that new companies can appear at any time, I think you're overestimating how hard it would be to create something as large and widespread as Twitter. You need more than an idea and some luck. Not really sure where you're trying to go in the last few sentences... every company ever created was once a startup. The last two sentences you seem to imply that there will be a lot of large players in existence in the next ten to twenty years. If Twitter is around in the next decade or two, it was probably a pretty decent investment.
Agreed that companies in the tech sector need to be constantly adapting. I did find it amusing that two of the companies listed here that are "afraid of change" are also listed as competitors above. That said, high risk has always been a component of investing in tech companies, but that shouldn't preclude you from investing in them. It simply means that you need to appropriately get rewarded for the risk and buy at the proper price.
The issue of margins is definitely a problem for Twitter since they haven't been profitable yet. Hard to guess what their future earning potential will be though since they recently rolled out more visual tweets (https://blog.twitter.com/2013/picture-this-more-visual-tweets). While they say it's for a better visual experience for the user, it's definitely so that Twitter can roll out visual ads which should improve revenues.
I do think your statement that "on-line advertisers choose Twitter because it is an effective way to touch millions of people from all demographics" is a bit misleading. Advertisers aren't looking to reach some large, diversified mass of eyeballs. What they want is specificity and the ability to target their ads. Contrary to your following statements, this is how Twitter can really differentiate itself and command high rates than the competition. Twitter offers a different perspective of data than Facebook, since Twitter is mostly based on an interest-based network as opposed to a relational-based network. Twitter is also increasingly becoming the preferred "second screen" of choice for live events, ranging from sporting events to TV shows. The ability to advertise based on a specific time in which you know your users are using your service could prove to be invaluable.
People do not go onto Twitter because it's "cool". People go on there to consume news, share information, and feel connected to celebrities that they would otherwise have no access to. In my mind, the aspect of "cool" is more applicable to a relational-based network in which most of the users I interact with are my friends and family. Facebook is the obvious current example, with MySpace being an example of something that becomes uncool. Do I care if my friend is on Twitter and I'm not? Absolutely not. Do I care if my friend is on Facebook where he can set up events and share pictures? Probably. That said, I'll admit the cool factor does play a role in attracting celebrities to participate. What the split in the user base between those that do it mostly to see what Lady Gaga or Justin Bieber is up to vs. users who use Twitter as a news source is unknown to me.
Not sure what you're trying to get at here. If I was the owner of a business, lots of deals in the market sounds like GREAT news.
Agree with this. Definitely will be a tough ride ahead, but again as I mentioned before, investing in technology has never been "safe". You need to risk adjust your rewards. If you're planning to evaluate technology firms, Warren Buffett should not be your guide as his philosophy on investing is obviously towards safer businesses with large defensible moats.
For a more quantitative look at Twitter's valuation from the valuation king himself, read Aswath Damodaran's valuation of Twitter here: http://aswathdamodaran.blogspot.com/2013/10/twitter-announces-ipo-valua…
The relevant valuation summary is here:
Twitter announced it's provisional range to be $17-20 per share, which would value it at around $11.1 billion. The range was lower than the market expected, most likely in reaction to Facebook's volatile IPO performance the bankers tempered the range. That said, there has been grumblings among analysts that Twitter will likely guide the range higher before the IPO on the back of oversubscription of the shares already.
To be fair, those are the competitors the management of Twitter (with the help of GS) has identified for its business. Just take a look a Twitter S1 Filing, it's on google. Plus, how do you define a competitor? Someone who sells exactly the same product? That is not an easy question.
I referenced that I acknowledged that your comp set came from management's S-1 filing:
And no... obviously it's not as simple as selling the same product. From my point of view, again, as I explained above, a competitor is someone who competes for the same source of dollars as you do. You can do it through different product offerings, but for Twitter its competitors are those who are vying for advertising dollars in the digital channels. Whether you should limit it to just social media or to include other sub-categories of digital like search is indeed, like you say, not so easy.
I was expecting an Alexander Hamilton thread. Surprised that this is actually semi-legit.
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