Twitter's (TWTR) share price immediately shot up after it finally hit the New York Stock Exchange floor this morning. Overly hyped IPOs, especially those involving popular and consumer-friendly companies like Twitter, are bound to generate trading momentum early. But this? As it stands now, with its 76% intraday jump in share price, Twitter is a $24.5 billion market cap company. Wait, what!?
Earth to investors
The expectations I outlined in yesterday's article -- that Twitter execs would get even greedier at the last minute and that emotion would carry its stock price even higher -- were hardly unforeseeable. The point, and it's become even more pressing after today's run-up, was that $26 a share isn't warranted yet, let alone $45. Why? Several reasons.
Unlike Facebook (META -10.56%) when it went public, Twitter exploded out of the IPO gates despite losing nearly $134 million year to date, on earnings of a mere $422 million. Twitter's reliance on the U.S. advertising market becomes even more of a concern with its ridiculous valuation. The growth in revenue, let alone earnings, to warrant Twitter's ridiculously high valuation isn't likely to come domestically; its already generating 88% of its revenue in the U.S.
The Asia-Pacific region offers huge opportunities for growth. And therein lies another problem for Twitter. Two early adopters of the tweet-master in Asia, South Korea and Japan, are fading at the same time user growth is declining. In South Korea for example, 64% of users send less than one tweet a month.
Obviously, less and less of Twitter's 500 million daily tweets are coming from those two key Asia-Pacific markets. Where does that leave Twitter today? With an over-reliance on the U.S. market and slowing user growth in key regions.
When Facebook's fumbled IPO finally came to fruition last year, the social media giant was value at over $100 billion. It dropped quickly, but this year it's earned back that valuation and more. Even on Day 1, though, Facebook's valuation made more sense than Twitter's $24.5 billion. In addition to the financials, the user base was nearly four times larger than Twitter's is today.
Where do we go from here?
Clearly, many of us underestimated the emotional aspect of Twitter's IPO. One explanation for its out-of-this-world stock price gain is that a larger percentage of Twitter's nearly 232 million monthly average users (MAUs) are also investors. Add in short-term thinkers with an eye toward making a quick buck, and the result is Twitter's $46 share price, give or take. Some Foolish investors may be kicking themselves for not trying to get in on Twitter's IPO. Well, you shouldn't be.
If you are generally interested in Twitter's prospects for future growth, and feel it has a legitimate shot at growing its user base and better monetizing its service -- including geographically diversifying ad revenue -- your time will come.
As maddening as IPOs like Twitter can be for long-term, thoughtful investors that actually care about fundamentals, don't let today's insanity get you down. Here's a follow-up prediction: By the year's end, Twitter's stock price will be closer to $30 a share than $40. Not cheap by any means, but Twitter's going to make a lot more sense for long-term growth investors before long.
