Twitter was the first in a long list of current (i.e. post-2000) startups where I thought to myself, Really? That's a $X0 billion business? I wonder if this is just the tip of the iceberg.
The main concern to investors is primarily the growth and their ability to warrant a premium price on the stock.
They're also consistently losing money. Even if you strip out half their capital expenditure or 3/4 of their R&D from their FY 2014 numbers, they would still lose money.
Let's say they can eventually run a 20% net income margin. This would turn their 2014 revenues into $280MM of earnings. Using the S&P 500's 21x P/E ratio, this values the business at $6bn. That's 70% less than their current market cap. And they don't appear close to running a positive margin, let alone 20%, on their 2014 numbers.
They're at $1.77b in sales the last four quarters. At the clip they're growing sales, they could certainly get to $3.5 billion in two years. If they ran the business properly, instead of pretending they're Facebook, they could generate $700 to $800 million in profit (purely in my opinion) two years from now. They'd get a rich valuation (Facebook is currently 90 times earnings); even half the valuation of Facebook would get them to $30 billion in market value two years from now, backed with real earnings.
So for Twitter to be a legit business valued at $18.5 billion (as it is today) they need to consistently churn out around $1.5 billion a year in pure hard core profit. They are nowhere near that and there's no sign of how they will get there. Hence all the negative pressure on the stock. When you bring it back to fundamentals that's the issue here.
All this tells me is that a lot of companies are willing to throw advertising budgets into the black hole of social media with no possible way of accurately measuring ROI.
However if you want to get somewhere you actually need to shift up at some point: growth numbers start to decline so they'll have to, before investors lose their faith even more and they end up in a downward spiral.
If I were to make a bunch of goods for $130/each, and then sell them for $100/each but managed to sell 10M of those goods should I be valued as a billion dollar company?
If operated and ran efficiently it has the reach and potential to produce billion dollar profits. I highly doubt we'll ever see a twitter like that though. They're too far entrenched in the culture of frivolous spending and Silicon Valley economics.
1. http://money.cnn.com/2014/03/06/technology/social/twitter-ca...
2. http://in.reuters.com/article/2015/04/28/us-twitter-results-...