Let’s paint a picture: You have $50,000 to invest and you want to be in the dry cleaning business. You go to your local dry cleaner and ask him how he did last year. He had revenues of $50,000. Then he explains that he also had liabilities of $50,000. So you ask him how he is doing this year. He is on track to have revenues of $100,000; however, he also expects his expenses to be $100,000.
As an investor, how much would you be willing to pay for this company? Probably not much.
Now we look at Twitter, Inc. (NYSE: TWTR). The company reported revenue grew from $135 million to $312 million—more than doubling from last year and surpassing the forecast of $270 million. However, their losses came in at $0.24 per share. If you take away one-time costs, the company made $0.02 per share. When you look at their losses year-over-year, they went from losing $40 million to losing $140 million. And yet Twitter’s stock price went up 20%.
Looking back at the dry cleaner, when he was breaking even at $50,000 in revenue a year he wanted $50,000 for his company. Now imagine this year when he breaking even at $100,000 in revenue and he wants $60,000 for the company.
Most people would say “no way!” Which is why we are bewildered at how investors are treating Twitter. When Twitter announces they have added 16 million users, people are getting excited. However, they have yet to figure out how to monetize their user data and capitalize on it.
When you invest a dollar, you expect to get $1.05 back. If a company does not have earnings, it is impossible to guess the value of that stock. In the long run, the only thing that matters is earnings. We find it very difficult to get behind these recent IPO tech stocks that cannot show earnings.
At Henssler Financial we believe you should Live Ready, and that includes understanding how the companies you invest in make their money. If you have questions regarding your investments, we can help: