Twitter IPO: No Profit? No Problem… Yet.

The social networking and microblogging service Twitter has yet to make a dime. Nevertheless, its shares skyrocketed in its NYSE debut, rising 73% on opening day. Its initial public offering was underpriced at $26 a share to prevent a repeat of Facebook’s troubled debut in 2012, but this certainly did not last. The company’s shares traded at roughly 22 times its expected sales in 2014, nearly double that of Facebook Inc. and LinkedIn Inc. This investor interest reflects a change in former valuation analyses of social media corporations. Twitter is far from turning a profit and has no physical assets, yet its initial public offering put the stock market in a frenzy as investors eagerly sought to purchase their own stake in the money-losing company. Why would someone buy shares in a company that posted a $65 million lost in its most recent quarter? The answer: Innovation.

Investors value innovation now more than ever, and twitter has changed the way the world communicates. "Twitter has, when coupled with the increasing distribution of smart phones and reach of the Internet, an impact on global connectivity and transparency," said former U.S. State Department spokesman P.J. Crowley. “It has definitely contributed to the acceleration of the news process and helped to expand the availability of information sources to a wide range of people."

Corporations that have thrived from innovation, like Google and Apple, have pushed investors to apply an “innovation premium” to novel companies. When Google went public in 2004, its valuation was one-fourth of the original value of Facebook. If we examine the most innovative companies trading today, we see a persistent rise in stock prices. For instance, despite selling fewer than 50,00 vehicles, Tesla’s shares continue to rise and maintain a bullish sentiment. In addition, Facebook’s shares have most certainly bounced back from its IPO disaster, as the company is currently valued at a staggering $120 billion dollars. It is undeniable that in today’s market, innovation brings about investor enthusiasm and therefore higher sales.

Twitter has proven to be an indispensible social media service that has yet to realize the lucrative potentials of global advertising. Its expanding volume reflects a vast amount of data flow that can be packaged and sold to firms interested in examining trends and public opinions. So on paper, Twitter looks good. However, most investors think that Twitter, Facebook, Google, LinkedIn, etc. are all interchangeable. They aren’t.

In a conversation I had with Mr. Michael Barrett, former Chief Executive of Yahoo!, Mr. Barrett expressed his doubts regarding Twitter’s possible advertising operations. “Platforms with real data on their members like Facebook, LinkedIn, and Google have a huge advantage over Twitter when it comes to monetizing their users” said Mr. Barrett. “If you can target ads to users based upon real personal data that people surrender during the registration process and when they use the service you can charge more for ads and sell more ads.” Twitter has no such power.

Though the microblogging service hundreds of millions of members and plenty of capital to expand, investors must be wary when grouping Twitter with the likes Facebook and Google. It has the means to grow and profit considerably given its comprehensive membership that includes celebrities and politicians, but when it comes to emulating the success of Facebook, Mr. Barrett said teasingly, “I think my cat has a Twitter account and other than an occasional Friskie ad my cat doesn't generate a lot of value for Twitter.”

Twitter can be a huge hit, but as Mr. Barrett advocated, investors must realize not all websites are the same.

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Chris Kenny