As Twitter flies, fears of a 'bubble' mount

Twitter's share values have soared since listing last week. Image: Yahoo!

The opening day gains of more than 70% after its initial public offering (IPO) stirred memories for some of the dot-com boom-and-bust of the late 1990s.

Daniel Ernst at Hudson Square Research issued a "sell" recommendation because he believed that Twitter's more than 600 times higher than its projected earnings before depreciation and other charges.

"There seems to us there is no upside that's not already in Twitter's implied growth outlook. We believe too much emphasis has been put on Twitter's valuation. The views are focused on softer metrics like sales and users and not enough on profits," Ernst said.

The research firm Dealogic said 41 US listed technology or Internet IPOs have raised US$7.8bn so far this year, down from the US$20.5bn in 25 deals last year, although Facebook accounted for US$16.0bn of that. "The peak year was 1999, when 373 IPOs raised US$39.9bn," the research firm said.

Overheated market?

Analysts are divided on whether the market has become overheated.

"It is reminiscent of the dot-com bubble, but this time the companies seem real, so it isn't clear to me that the bubble will break," said Michael Pachter, head of equity research at Wedbush Securities, who follows emerging technology companies.

Wedbush issued a "neutral" recommendation for Twitter, with a price target of US$37 -- well below the opening day price.

Twitter shares surged 73% last week, rising from the US$26 opening price to close at US$44.90.

Pachter wrote that the valuation of Twitter is extremely difficult because of uncertainties about growth in advertising, and the company's costs in terms of marketing and research.

"We think that an early investment in driving increased usage will pay dividends in future years but we aren't prepared to forecast positive net income for next year," he wrote.

Lou Kerner at the Social Internet Fund said it's not clear who will be the winners and losers in this emerging sector. "I think we're in a period where investors are more focused on the upside opportunity than the risk," Kerner told AFP in an email.

"While the significant global social media opportunities will enable the great companies to grow into their valuations and beyond, the weaker companies will see their valuations crushed," Kerner said.

Concerns expressed

Mary Jo White, head of the US Securities and Exchange Commission, expressed concern this week over the over-zealous interest of investors - lured by huge numbers of users of social media - in technology stocks that provide uncertain profitability.

"Our staff's concern has been the impact on investors of the sheer magnitude of some of these metrics," such as the number of users, she said in a speech.

Twitter has fast become engrained in popular culture but must still convince investors of its business model, having lost more than $440m since 2010.

But with 232m users and growing, Twitter is expected to be able to reach profitability by delivering advertising in the form of promoted tweets. It also expects to make money from its data analytics.

Trip Chowdhry at Global Equities Research, who has been skeptical about Twitter's valuation, said it is a great company but it is too optimistic to assume massive growth in social media use around the world. "There are a finite number of people on the planet and only 24 hours in a day," he said.

He said Twitter's valuation based on its financial data should be no more than around US$8bn, compared with the US$24bn that emerged after the shares closed at US US$44.90 last week.

"Twitter needs to show it can execute on revenue growth and profitability in the next year or two," Chowdhry told AFP.

"Twitter is a bubble by every metric. When you are in a bubble stock you don't want to be the last one to get in," he added.

Source: AFP via I-Net Bridge