Does Twitter Stock Mania Tell Us Markets Don’t Understand the True Potential of Cloud Products?

As Steven Russolillo wrote in an article titled Twitter Downgraded: Nothing Has Changed . . . ., which was published in the Wall Street Journal on Friday, December 27, 2013, “Twitter’s high-flying stock has gone too far, too fast.”

But when one considers the Twitter stock price phenomenon within the context of a few other recent nonsensical events (for example, the increase in the stock price of Adobe despite its well publicized security problems, and its comparatively unprofitable transition to a cloud, Software as a Service (SaaS) subscription model for its leading Creative Suite product set), it shouldn’t be difficult to see the difficulty markets are having identifying real lasting value in cloud product offers. The distance between stock market valuation and actual profitability for publicly traded cloud businesses, including Twitter, Facebook, or LinkedIn, along with mature ISVs like Adobe, will not last more than a week, month, or, perhaps, a quarter or two. Inevitably the prices will have to come down, perhaps via a very hard landing.

Equipping Twitter with an advertising component at once attractive for customers, and promising from a profitability perspective, is not likely to be an easy proposition. What will work for a retailer looking to move closeout stock, is not going to work for a market commentator with a small circle of readers. Each of these Twitter pages requires a different type of advertising feature. But market analysts seem to be looking for click advertising banners to simply pop up all over Twitter pages. At the same time, the most optimistic of these analysts are also expecting a lot of clicks on those ads. Not so fast is what I have to say on the subject.

Analysts like Macquarie Equities Research (the subject of Mr. Russolillo’s short article in the Journal) are sensitive to the danger. But rating the stock an “underperform” for the future, is, perhaps, too understated. I think it makes more sense to rate it a “sell.” Investors fortunate enough to have a position in the stock as it made its move should sell to lock in gains. The future for the stock prices of Twitter, and its peers, doesn’t look so bright.

I have no current investment, whatsoever, in Twitter, or any other publicly traded business mentioned in this post.

Ira Michael Blonder

© IMB Enterprises, Inc. & Ira Michael Blonder, 2013 All Rights Reserved

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