The View

Call me old-fashioned – but revenues, business plan trump hype on companies like Twitter

Perhaps the fundamental issue of profitability should have been more clearly addressed at the time of Twitter's IPO because...there was little more than a vague suggestion that as more and more people came to use Twitter it would somehow become more and more profitable

PUBLISHED : Wednesday, 17 June, 2015, 9:50am
UPDATED : Monday, 19 September, 2016, 3:38pm

Stock market investors cheered the departure of Twitter’s CEO Dick Costolo by pushing up the company’s share price. As no permanent replacement has been found, market players seem to be gambling on the idea that any kind of change is likely to be positive.

This is the market’s usual reaction to the departure of a corporate leader who has failed to deliver satisfactory returns to investors. In Twitter’s case the share’s performance has been abysmal, never rising above the first day’s trading record one and a half years ago.

Is this all Costolo’s fault? Or could it be that shareholders had unrealistic expectations for Twitter’s performance? After all they willingly bought into a heavily over priced stock because, well because, Twitter somehow seemed to be of the moment and anyway many investors were tweeting away like mad, certainly enough to have made the company’s name into a verb.

Yet all this frenetic activity did not translate into impressive revenues even though Twitter’s user base grew enormously under Costolo’s watch. Meanwhile other things were happening, one of them being a rather impressive record for turnover in the company’s senior management, which hardly suggests that changes of personnel were the key to greater profitability.

Perhaps the fundamental issue of profitability should have been more clearly addressed at the time of the IPO because, to the best of my knowledge, there was little more than a vague suggestion that as more and more people came to use Twitter it would somehow become more and more profitable.

The fact that it has 1.4 billion users is, after all, pretty impressive but as matters stand they can tweet away without paying a cent and this proliferation of users has proved hard to monetize.

Costolo must shoulder some of the blame for the inability to translate usage into cash. Yet it took a while before this started to bother the bright young folk who manage spectacular sums of money for various funds.

They seem to regard themselves as being dynamic and intensely mobile, especially when it comes to seeking better employment possibilities. Therefore they have an inclination towards shares that appear to reflect this dynamism and towards companies that are prepared to ditch leaders who are not up to par.

Personally, I’ve always steered well away from investments that I don’t understand, particularly those that appear to be floating on the thin air of hype as opposed to the boring old fog of a business plan with clearly identifiable prospects.

A company like Twitter, that trades on a price to earnings ratio exceeding 30 times, is firmly on my ‘must avoid’ list.

No doubt these reservations can and will be dismissed as hopelessly out of date. The big picture, so we are told, is to look towards a very changed future where the fundamental engine of business will be generated in cyberspace and boring old analysis of how companies make money no longer applies.

Yet I cannot help noting that the cyberspace companies that are actually making real money have a pretty old fashioned way of doing it. The prime example is Google that rakes in revenues from what are in effect advertisements (older readers will remember the days when this worked pretty well for newspapers) albeit in the form of placement on Google web searches.

I understand this because web search placement is the main type of advertising used in my companies. We especially like the ability to trace cause and effect for every dollar spent.

Moreover I have a preference for companies with stable management teams even if they are run by Rupert Murdoch, of whom much that is negative can be said, but one thing he likes is to keep his management teams together and he remains loyal to executives through good times and bad.

The fact that he is now stepping back and semi-handing over the reins to his two sons clearly shows signs of nepotism but also continuity. And Murdoch has at least forced his sons to thoroughly learn the business even though the suspicion lingers that they will never acquire his instinctive grasp of what it takes to make money.

Meanwhile back at Twitter the interim CEO will be James Dorsey, who was both one of the company’s founders and a former CEO. Whether he will retain the job is unclear as is a plan for turning Twitter’s impressive user numbers into folding notes.

The excitable folk who populate the stock markets don’t seem too worried by that, they just like the fact that something new is happening at Twitter. Yet again we see the folly of trying to judge the sustainability and worth of a business by looking at its share price. Share prices can change by the second, businesses work quite differently.


Stephen Vines runs companies in the food sector and moonlights as a journalist and a broadcaster