Twitter IPO: Overvalued or the Start of Something Big?
Although it has yet to make a dime, share buyers valued Twitter's IPO at $25 billion. Asks professor Chet Huber, what do they see?
Twitter soared high on its first day of trading on Nov. 7, with its shares closing the day at $45 for a value of $25 billion. Even though TWTR has yet to make money, investors flocked to the stock in droves, eager to own a part of the company that has revolutionized the way people around the world communicate and made abbreviations like RT (retweet) and ICYMI (in case you missed it) part of the lingo of Twitter users everywhere. What to make of all this? Senior Lecturer Chet Huber, who joined the School's General Management unit after 37 years at General Motors and teaches a popular elective focusing on disruptive technologies, offers his analysis of the Twitter IPO phenomenon.
In our second-year MBA elective Building and Sustaining a Successful Enterprise (a course developed by my colleague Clay Christensen), one of the concepts we study is new market disruption. Twitter exemplifies that term, allowing its users to "consume" information in ways that were formerly unavailable to them due to cost, complexity, or both. The fact that half a billion consumers willingly engage on Twitter's platform confirms the viability of the "job" they're being "hired" to perform, providing opportunities for real-time conversations and engagement to people around the world.
The company has accomplished this by taking advantage of the modular nature of today's ubiquitous communications infrastructures provided by the Internet and wireless data networks, whose massive investments and standard interfaces have allowed Twitter to focus on their unique plug-and-play component. Beyond that, they have created impressive and scalable operating capabilities of their own though an impressive combination of resources and processes. They have built it, and others have come—in high volume.
So far, so good. What's missing is the confirmation of a profit formula that turns volume into serious cash. Another theory we think about in new growth situations is something we call "good money/bad money." It asserts that in the early stages of an enterprise, when the business model and profit formula are not clear, investors represent good money if they're impatient for confidence in the emerging idea's profit model and patient for growth while that's being figured out.
Scaling before having a viable profit formula commits resources to a path with high risks to capital, but more important, risks committing to an approach that may need to fundamentally change—something that is harder to accomplish at scale. That said, the pursuit of coveted "network effects," with winner-take-all rewards to the dominant platform and a high number of users, argues for getting big fast and figuring the profit part out later. The concept is overused, but it's in play here, and the market, at least for now, is applauding loudly—to the tune of a market capitalization of some $25 billion at the close of the first day of trading last Thursday.
Where does this go? Only one thing is for sure, the underlying forces that we call disruption are already at work in this relatively new category that has anointed Twitter as the leader of the pack. Sustaining a successful business position generally requires two things: having a successful position and being able to leverage its viability in an adaptive fashion to meet the challenges presented by new, disruptive insurgents. In this case, figuring out that model while others are building new ones to attack it under the glare of incredibly high investor expectations should make for a lot of interesting times ahead. My colleagues and I will be watching closely, along with 500 million or so other users and observers.