The Value of Social Media
November 10th, 2013
The biggest news coming out of the NYSE this week was Twitter’s debut as a publicly traded entity. Twitter issued 70 million shares in their IPO at a price of $26 per share. This means that the lead underwriting team at Goldman Sachs and the associate banks involved in the valuation, Morgan Stanley and J.P. Morgan Chase, considered twitter to be a service worth at least $1.82 billion. A high valuation by any metric by any metric but the markets disagreed, by the end of the day TWTR shares were trading for $44.90 a piece. This under-valuation could’ve been a strategic decision by the underwriting banks to avoid the slide that Facebook underwent following their pie-in-the-sky pricing but there’s something to be said about the near 100% increase in share price that occurred in only the first day of trading.
Clearly, Twitter has a huge amount of perceived value among traders. This can’t be explained by profitability however, or any financial metric for that matter, because Twitter thus far has not proven itself to be a profitable company. So why would investors cause Twitter’s value to surge despite having no solid financial assurances about Twitter’s ability to generate profits? The answer is that investors the world over are now recognizing the value of social media. Twitter is tool used by everyone from Barrack Obama to UBC commerce classes. It’s much more than a platform that can be harnessed for advertising revenues, people realize that although it might not be tangible yet, the massive user-ship Twitter has as well as its predominant role in modern journalism and news reporting have an intrinsic value that makes Twitter a multi-billion dollar company. It’s a paradigm shift in the way the market views the social media world and it’s a shift brought about by a better understanding of how these platforms work.