Twitter Madness: Is its growth sustainable? - CNBC Africa

Twitter Madness: Is its growth sustainable?


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Twitter recently listed on the New York Stock Exchange. PHOTO: Getty Images

Micro blogging company twitter, whose share price soared 73 per cent on its trading debut, could face a big challenge of convincing investors that it won’t fizzle out as soon as another competitor steps into the market.

The social media company priced its IPO above the expected range at 26 U.S dollars on Wednesday evening, above the targeted range of 23 U.S dollars to 25 U.S dollars, which had been raised once before. This prompted speculation amongst investors on whether the stock was too expensive.

Twitter boasts 230 million global users, including heads of state and celebrities, but it lost 65 million U.S dollars in its most recent quarter and questions remain about long-term prospects. After the IPO, the company is worth 25 billion dollars despite its massive valuation, some analysts have expressed concerns about whether it can sustain user growth, given that it is yet to turn a profit.

Brian Wieser, an analyst at South Africa based Pivotal Research Group who valued Twitter this week at 29 U.S dollars a share says, "There's still so much uncertainty and it's so difficult to even identify how big the opportunity is.”

The hype of twitter’s IPO has triggered nostalgic memories of the tech bubble in the 1990’s.

Start-ups were popular back then; however they had no real business model and few prospects of building real companies. Investors happily obliged, generating millions of dollars for corporate insiders, and before long, Silicon Valley had no shortage of firms with cash and armed with little more than a pipe dream. But when interest rates rose, companies such as and started burning through their cash piles very quickly. 

One of the many reason’s start up company’s generated investor interest was the low interest rates of the 1990’s. With interest rates in the U.S now at a historical low of 0.25 percent a similar scenario appears to be playing out.

“I feel like we are in the movie groundhog day, the financials of this company are horrible and there are no prospects of this company making money in the next couple of years,” said Andrew Stoltmann, a securities lawyer.

During its road show over the past week, Twitter executives assured investors that the company could wring more money out of international users and smaller businesses by opening offices abroad and expanding its self-serve advertising products.

The social media platform also said last month that its third-quarter revenue more than doubled to 168.6 million U.S dollars, but its net loss widened to 64.6 million U.S dollars from 21.6 million U.S dollars a year earlier as costs increased.

Twitter’s appetite frenzy is a sign that investors have confidence in the company’s CEO and his potential ability to turn the 230 million or so users into a profit. Other young companies such as Pinterest could drive the hunger for social networking companies based on market value.