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Money Matters: Tweeting for profits

Nov. 19, 2013 at 5:19 a.m.


For the record, I have never tweeted on Twitter. I am too longwinded for such a simple communication platform.

Most of my students tweet and, as such, it is pretty easy to see some generational differences. However, Twitter is popular with far more than the under-30 crowd.

Conceptually, I have no problem with Twitter and think its founder, Jack Dorsey, is incredibly bright.

Much of the Twitter brilliance is its simplicity. The technology is nothing earth shattering. The sender is limited to 140 characters. This one aspect has probably brought the ire of every language teacher in the world. Mashed up abbreviations aside, Twitter allows large numbers of followers to receive immediate updates on virtually anything you can cram into 140 characters.

For me, I really don't care what you had for breakfast or that your cat just did something amazing. I have no need to know the latest pithy meanderings from Lady Gaga, Katy Perry or any of the Hollywood illuminati. The same is true of professional athletes. From this aspect, the allure of Twitter is slim.

However, for millions of people worldwide that may have no other means of communication, I see its usefulness. This is certainly true of war-torn countries and repressed regions ruled by tyranny. Many of these ruthless governments have already attempted to ban Twitter because it is quick and effective.

Now that Twitter has floated its initial public offering, many wonder if its stock belongs in their portfolio.

For us, the answer is "no." Regardless of Twitter's purpose as a fast-growing communication network, it does not necessarily make it a good business.

Twitter's revenue growth has been amazing - jumping 104 percent just in the last quarter. However, you can't eat revenues. It has no earnings - in fact; it has lost $134 million through the first nine months of the year. Twitter management does not expect to turn a profit until late 2014 or into 2015.

Several other comparisons between Twitter, LinkedIn and Facebook show Twitter trading at elevated levels.

The value of Twitter stands at $24 billion. With the sky-high valuation of this company as well as LinkedIn and Facebook, one is eerily reminded of similar valuations associated with the companies of the late 1990s.

Twitter's future profit picture is predicated upon signing up lots of micro-advertisers as well as development of Twitter as a second TV source. Although that sounds good, it is unproven.

Further compounding matters is the very technology itself. The backbone is simple, and there are no great patents or other barriers to entry protecting the company. The only reason the company exists is because individuals desire to share things. As such, the users supply the content. Twitter has no valuable real estate, pools of oil or decades-long sales of your favorite beer, soda or other product.

Finally, one has to ask what Twitter will look like in 10 years. It already has competition from the likes of Facebook, Google, LinkedIn and Snapchat - and those are just the potential competitors we know of today. Given the low barriers to entry, a variety of competitors could be right around the corner.

This brings up a fundamental virtue of successful investing: If it is too hard to figure out, walk away.

It is quite conceivable that Twitter may change society. However, much like the invention of the car, air travel and the Internet, the wise investor will remember that simply transforming society does not make for a good investment.

Dave Sather is a Victoria Certified Financial Planner and owner of Sather Financial Group. His column, Money Matters, publishes every other week.



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