Sunday, November 10, 2013

Just a reminder: Twitter lost $134 million in the first nine months of 2013.

Gross revenues were $28 million and the net loss $67.4 million in 2010 (the year it was supposed to have turned a profit because it began licensing your data); $106.3 million in gross revenues and $127.4 million in net losses in 2011, and $316.9 million in gross revenues and $77 million in net losses 2012. That's a huge jump -- a 111.9 percent rise in revenue! But costs have more than outstripped revenue increases, rising 411.4 percent. Twitter has $375 million in cash reserves.

Twitter has just 215 million monthly active users -- far, far less than expected. Less than half of them are in the U.S.

CEO Dick Costolo draws an annual salary of $200,000 plus $10 million in stock.

Roughly 85 percent of Twitter's revenue comes from selling ads, and the rest comes from licensing user data (provided free to the company from people like you) to third parties.

So why did Twitter's stock price rise 73 percent on the opening day? First, so long as Twitter can cover payment on its debts, it can stay afloat. Economists talk about "fixed costs" and "variable costs". Fixed costs are business expenses that do not rise or fall based on the amount of good or service produced. For example, rent on the 10,000 square feet of factory space must be paid each month regardless of whether you produce any good or not. The annual salary (not the hourly salary) of workers must be paid no matter whether any service is produced. Variable costs are directly tied to production, however. You need more fabric if you make more shirts, you need more electricity if you make more computer chips, you pay more salary if you work hourly workers longer.

In the long run, a company need only cover its variable costs and debt service, however. A company's credit rating will remain basically unimpaired if it can pay off the interest on debt each month. It doesn't have to pay down the principal. Because its credit rating remains good, it can actually take on more debt to pay rent, annual salaries, and the like. So long as the firm can continue to generate enough revenue increases to cover the higher debt service payment, no bank is going to force the company to pay the loan (and see the firm go bankrupt, and lose all its money). Rather, the bank is going to hope for profitability somewhere down the road and see the principal get paid. Or the bank is going to hope to sell the loans to some other sucker. Indeed, at some point, a business will simply refinance its debt -- paying off the original lender with a loan provided by a new lender. Each bank is happy.

That's where Twitter is. It's generating enough revenue to pay its variable costs (more servers to handle more traffic), and enough to pay debt service. But so far, it has generated only increasing debt: $67.4 million plus $127.4 million plus $77 million, for a total of $271.8 million in total debt.

So why, if the company is not profitable in the slightest and only piling on more and more debt, did the stock price rise?

Because people irrationally wanted to buy it. They hope to make money off the rising stock price, not off corporate profits.

It is, in other words, sheer speculation.

In the long run, that bubble will burst. It can take a long time for stock bubbles to burst (just look at Amazon.com, which has $20 billion in debt and only a few quarters of profit since 1993). But it will burst.

Twitter is interesting in that it's not tied to images to a Web site. It is a texting service, and therefore very adaptable to mobile devices. Twitter is generating tons of profit off ads on mobile devices, while Facebook and Google are not.

So let's turn that around: Twitter is an advertising service, with a free text messaging feature attached.

But if advertising revenues drop..... either due to competition or an economic downturn....... Twitter is fucked.

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