Whether you're a fan of Twitter (NYSE: TWTR ) or not, there's no denying the recently announced deal with advertising giant Omnicom Group (NYSE: OMC ) was a whopper. The two longtime partners inked an agreement worth over $200 million to Twitter, and as the last couple days have demonstrated, investors are ecstatic.
The question is whether or not the Omnicom deal warrants Twitter's 12% jump in share price since the news broke on Tuesday afternoon? Or, is the recent stock price rally more of the same irrational exuberance we saw following Twitter's IPO late last year? You may recall, after Twitter set a $26 a share initial offering price, investors subsequently ran its stock price up over 70% the first day, and eventually as high as $74.73 a share, before reality finally set in.
When Twitter spent $350 million for the mobile advertising platform MoPub last September, the deal with Omnicom was exactly what it had in mind. The objective of MoPub is to help clients better monetize their mobile advertising efforts, and with nearly 80% of Twitter's 2014 Q1 advertising revenues of $226 million coming from mobile, MoPub was a no-brainer. Clearly, that's what Omnicom thinks, too.
The deal is worth $230 million to Twitter and will incorporate Omnicom's ad buying unit with MoPub. That's significant revenue considering Twitter's guidance for all of 2014 is in the $1.2 billion to $1.5 billion range. But the $230 million is a two-year deal, meaning Twitter should see about slightly less than a 10% jump in annual revenue from the Omnicom partnership. Nothing to sneeze at, but not quite worth investor euphoria, either.
From Omnicom's perspective, according to one of its division execs, the deal with Twitter will "drive better pricing." Great news for Omnicom, but not so much for Twitter. Even as the undisputed leader of all things social Facebook (NASDAQ: FB ) continues to charge its advertising clients more, Twitter's locking in rates with one of its biggest clients for two years.
Most credit former Fed Chairman Alan Greenspan with coining the phrase "irrational exuberance." Not coincidentally, Greenspan's use of irrational exuberance came on the front end of the dot-com bubble, when irrational investors ruled the day. Essentially, it can be described as investors foregoing fundamental analysis and risk assessment in favor of stocks that are the "flavor of the month." As Twitter showed us following its IPO, there are no shortage of investors exercising their right to act with irrational exuberance.
Since the announcement of the Omnicom partnership, Twitter's stock price has been driven less by the revenues the deal would bring, and more by investors who've simply been chomping at the bit for any piece of good news to justify their love of tweeting. That's not a recipe for a long-term investment success, to say the least.
A dose of reality
It's taken a while, but Facebook stock is slowly but surely gaining some traction. The difference between Facebook's steady share price rise and Twitter's 12% pop is there are tangible reasons to consider the former. For example, Twitter reported a 25% increase in monthly average users (MAUs). Not bad, but a figure that's slowing and has precipitated concerns over Twitter's growth. Facebook, despite being five times larger based on MAUs and 10 times larger based on sales, still grew another 15%, to 1.28 billion active users.
Facebook really impresses compared to Twitter where it counts: sales. Sure, Twitter increased advertising revenues 125% compared to Q1 of 2013, something you'd expect from an early stage growth company. Facebook's ad revenues also grew, a staggering 82% compared to the year-ago period. And let's not forget Facebook's concerted efforts to generate additional gaming revenue following its $2 billion Oculus deal, and the shout out to app developers at the recent F8 developer's conference.
Final Foolish thoughts
The reason Greenspan's irrational exuberance phrase is now part of the financial industry's lexicon is it explains stock price jumps like Twitter's so perfectly. Feeling a little better after the Omnicom deal? Sure, it was a nice win for an upstart company, and its shareholders, in dire need of some positive news. But the bottom line is there's little to no rational argument for Twitter as an investment at these levels, especially with an alternative like Facebook right next door.
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