Twitter seems to have learned from the Facebook IPO flop and priced its stock reasonably for its initial public offering. The stock was priced at $26 for the IPO and opened at $46. By mid-day it went up and down and settled in the $45 range. So, as twitter stock gives a tremendous tweet, we wonder just how valuable is the company. After all it has been losing money. With a market valuation of over $18 billion that gives a value of nearly $80 per user. But the question as twitter stock gives a tremendous tweet is if the company will make money and if the stock will go higher or lose ground.
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Social Media Companies and Profits
Social media is very popular but the rap on the companies that provide these services is that they do not necessarily make money. That was the issue with Facebook which went high and then tanked on the first day. Many criticized the company for setting its IPO price too high but people still bought it on the promise of growth. Then, when the stock fell, everyone rushed for the exit as market sentiment went against the stock. Fundamental analysis of Twitter tells us that what they have going for them is a popular way to communicate via social media. They do not own large tracts of land, factories, or parts of other companies. Thus they have little or no margin of safety and their price is solely based on the expectation of growth and the hope that when they grow they find ways to make money as well.
Is a Social Media Platform a Good Investment?
Before Facebook went public we asked if Facebook would be a good investment. The question is how do you monetize social media? Basically you put ads on the sites. However, it is much easier to put ads on computer screens than on hand held devices. The companies that make money in this realm will need to keep attracting large followings for their services and find ways to put ads in the face of the user. When this happens folks will pay the likes of Twitter for the use of their platform for advertising. While Twitter stocks gives a tremendous tweet today on opening it will do better over the years as it grows and gets a handle of how to monetize itself.
Investing in Growth Stocks
Many investors invest solely in growth. When a company settles into a solid position in its market niche but ceases to growth these folks leave. These investors have a good sense of both fundamentals and evolving market sentiment. As it opens and Twitter gives a tremendous tweet the current fundamentals are weak. If one believes that the company can grow and increase revenue the intrinsic value of the company may well be more than where it is trading at today. Belief is the key. Market sentiment is based on what investors believe about the future. So long as investors believe that there is great growth potential in Twitter they will support the stock price and even bid it up. But, once investors believe that any growth potential is exhausted they will sell in droves and send the Twitter stock price plummeting. If your goal is to make money in growth stocks like Twitter you need to know the fundamentals and watch the market closely as a spooked market can fall rapidly.