Case Study

TWITTER

Introduction

In the past two decades, the market has been filled up with cash without
real valuations sometimes (Trainer, 2016). This means that many stocks
have traded at incredibly high prices without real business supporting
them. This is the case of Twitter, which by the end of 2013 debuted on
the New York Stock market with a stock initially valued at $26 per share
but eventually debuted at $45.1 due to an oversubscription. The
objective was to obtain at least US $ 2100 million in the offer (La Nacin,
2013).

According to Cowan (2012), oversubscribed shares are supposed to

reflect the great interest of investors for an Initial Public Offering (IPO) by
comparing the number of shares they are willing to buy to the current
number of available ones. The problem is that when there is no
correlation between the price performance and the over subscripted
prices, it may be that the price deal was too high and risk to take a huge
dive down at the end.

Background

Twitter came out in 2006, founded by Jack Dorsey, Biz Stone, and Evan
Williams. The company is a social networking and blogging platform that
allows users to be connected by posting latest updates. Twitter is an
emerging firm that highlights its simplicity and "spontaneity without
filter" (Scarpinelli, 2013). The network became an original way of
accessing information on the web and "chatting". Twitter, a company
that is based on the digital experience of real events and the second
screen of the TV, had until 2013 about 218 million monthly users in the
world, of which 100 million participate and produce 500 million tweets
daily (Scarpinelli, 2013).
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TWITTER

Nevertheless, Twitter business model has brought the company to be

positioned in several difficulties. Most Twitters revenue comes from
advertising; the company offers a free model to get the maximum
possible users and thus attract more advertisers (Carlson, 2011). The
problem is that on the past years this working model is not working as
expected, as users are decreasing its usage on this platform and
adapting to other competitive brands. Therefore, experts insist that the
company needs to monetize its business and explain how it could do so
(Demos, Dieterich & Koh, 2013).

The most critical issues for Twitter are its negative profits getting even
worse, the small user based compared to its competitors, the slow
growth in new users and the greatly overvalued stock price (Trainer,
2016). Unfortunately, the fact of shares being hovering around and
ending up in $44.90 from its original price of $26, made Dorsey a
billionaire, but just in paper. By the closing of the IPO, stocks units had a
value of $3.86 billion, giving an average of $1.68 million per employee.
(Demos, Dieterich & Koh, 2013). It could be understood that one of the
reasons for such high prices on the stock market is investors paying for
untapped potential, as Twitter isn't actually profitable. Twitter was by the
end of the year 2013, the most expensive stock in its group, valued 20
times more of the expected future two-year term in sales.

Possible Consequences

Internet and technology have proved to be one of the latest tendencies

in today's worldwide business, however, there is a propensity for
entrepreneurs to be over-optimistic about the Internet potential (Geier,
2013). A clear example was the internet bubble crash which took place
by the end of the 1990s, where the euphoric attitude towards internet
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TWITTER

business created the assumption that all online companies had a great
economical future. As a result, Geier (2013) explains that all companies
that were launched during this period were having significantly
overvalued stocks ignoring the lack of revenue or cash flow. This ended
up with investors having significant losses due to their unrealistic values.
It is, therefore, important to consider that another crash could be a
possible scenario for Twitter if investors and directors are nor careful
enough and prices are over the roof without a real market analysis.
Nevertheless, the internet is a reality and a continuous market that we
cant stop. It has changed everyones lives in terms of communication
and it has directly affected the way of doing business.

Social networking by instance is a big trend in today's world, and other

than Twitter there exists big competitors that are directly having an
impact on Twitter's users. The main players in the online industry are
Facebook, LinkedIn, and Instagram, and they have been taking some of
Twitter users in the past two years. The first two are profitable
companies, which are implementing methods to make money but giving,
through it, better benefits to their usages, the third one is based only on
images and photos but gives the possibility for users to be constantly
updated about other's activities (Geier, 2013). If Twitter does not give its
users a different and new experience, it is likely for these companies to
take even more of its users and affect the company's economic future.

Recommendations

In order to manage the company's current situation, Twitter directors

must address both revenue and competition problem by developing a
business strategy that will increase the users and start giving a direct
profit to the company. The main factor that has to be clearly identified
by all Twitter shareholders is the fact that popularity does not equal
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TWITTER

profit and new business opportunities have to be employed. In other

words, Twitter has to increase their advertising and marketing data share
to third parties to develop a stronger business relationship with other
companies that could support Twitter in a middle and long term plan.

Twitter could also implement a different type of business models

associated with its own platform. From launching new tools to measure
the reputation of specific accounts, to launching premium services or
even offering the possibility of making payments through the platform.
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TWITTER

References:

Twitter sale a la Bolsa para recaudar 2100 millones de dlares. (2013,

November 7th) La Nacin. Retrieved from
http://www.lanacion.com.ar/1636053-twitter-sale-a-la-bolsa-y-quiere-
evitar-los-errores-de-facebook

Scarpinelli, L. (2013). La salida a bolsa de Twitter agita al Mercado. La

Nacin. October 13th. Retrieved from
http://www.lanacion.com.ar/1628366-la-salida-a-bolsa-de-twitter-agita-al-
mercado

Carlson, N. (2011). The Real History of Twitter. Business Insider. April

13th. Retrieved from http://www.businessinsider.com/how-twitter-was-
founded-2011-4?IR=T&page=1

Geier, B. (2015). What Did We Learn From the Dotcom Stock Bubble of
2000? Time. March 12th. Retrieved from http://time.com/3741681/2000-
dotcom-stock-bust/

Demos, T., Dieterich, C. & Koh, Y. (2013). Twitter IPO: Relief, Riches and a
$25 Billion Finish. The Wall Street Journal. November 7th. Retrieved from
http://www.wsj.com/articles/SB100014240527023033095045791824034
32312182

Cowan, L. (2012). Oversubscribed is a Weak IPO Signal. The Wall Street

Journal. June 17th. Retrieved from
http://www.wsj.com/articles/SB100014240527023038222045774689311
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