After all the hype surrounding Twitter's IPO last fall, the social media service reported a disappointing end to 2013. As growth in the number of users both in the U.S. and around the world tapered off, surprised investors sold the stock down 24 percent the first day after its earnings were released. Yet even after the recent price correction, Twitter stock has a sky-high valuation.
In the last three months of 2013 Twitter roughly broke even. The company reported a huge loss of $511 million, but excluding onetime stock costs associated with its IPO Twitter made a modest profit of $10 million. That's small potatoes compared to its stock market value, which is in the neighborhood of $27 billion. If profits stay where they are, it would take nearly 700 years to pay back an investment in Twitter stock from company earnings.
To put that in perspective, look at Google, a bigger and more established web giant. Based on its 2013 earnings of $13 billion and market cap of $390 billion, it would take around 30 years to pay back an investment in Google through earnings. And tech wizards like Google represent the high end of valuations. A more typical payback rate would be around 10 years. An investment in ExxonMobil, for instance, would currently take about 12 years to pay back.
Twitter has a long way to go and a lot to deliver to live up to such high expectations. Investors may be looking for the next Facebook, but Twitter looks less like that site than it once did. No one really knows how much money it will make or when. While Twitter shows signs of increasing advertising revenue per user, growth in the number of users has slowed, particularly in the critical U.S. market. At the moment, owning Twitter shares looks a bit like the triumph of hope over experience.