Yesterday we highlighted Twitter’s spectacular first day of trading, where shares ended the day at $44.90, a 73% increase over the IPO price of $26. The strong debut of $TWTR was tempered today, as shares dropped 5% to end with a closing price of $42.32. This leaves Twitter’s valuation at $23.5 billion. The hype machine for Twitter is in full effect, given that Twitter has a market cap only $600 million lower than LinkedIn and has yet to turn a profit. LinkedIn, by comparison, is already profitable.
Given that Twitter is still in the red and figures to be so for at least the next year, some investors have already started waving a huge red flag for the investment prospects of the company. Henry Blodget from The Daily Ticker has advised investors to stay clear from $TWTR, saying that for a price of $45 per share, analysts are counting on Twitter to generate $3 billion of revenue in two years. Twitter’s most recent financials show revenue of about $600 million the past year, so to meet expectations the company would have to increase revenue by 5X within only two years. This is likely to be a very difficult task considering that Twitter, while enjoying over 200 million users, is still far less used compared to Facebook.
As investment firms, top executives, and early employees cash in on their instant billions, retail investors could be left holding the bag for the foreseeable future. But just as Facebook surprised Wall Street by significantly improving its revenue from an unexpected source – mobile advertising – perhaps Twitter can sustain the hype over the long term. Only time will tell.