Can Twitter Help or Harm Your Portfolio?
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2011 became a stellar year for Twitter when the social media giant reached 100 million active users, thanks to the likes of such celebrity-drenched zingers of one Mr. Charlie Sheen, and to the (albeit brief) messages of peace from revered world leaders of Nelson Mandela and of the Pope. Also this same year, the San Francisco-based company, landed its 200 millionth account member on July 16; just two days before the fifth anniversary of its official launch into internet stardom. And while the majority of tweets are on current (world) events, sports, natural disasters, and entertainment, one other factoid that is grabbing attention are tweets on investments.
According to TechCrunch, at last count on October 17, 2011, there are on average 250 million tweets per day, and startup - hungry venture capitalists are scouring through the 140-character-max posts for hot investment tweets. Since initiation, Twitter Inc. is said to have cumulated “over $750 million in direct venture capital, from firms like Spark Capital, Union Square Ventures, Kleiner Perkins, Benchmark Capital, Institutional Venture Partners, T. Rowe Price (NASDAQ: TROW) and DST [Digital Sky Technology] Group,” courtesy of CNNMoney.
Added to the firm’s frenzy, major international backing for the privately-held company has put Twitter into an even narrower tunnel scope for investors. Saudi billionaire Prince Alwaleed bin Talal and his investment company recently invested $300M in Twitter “increasing the microblogging site’s cash cushion as its user base expands,” as reported by ABCNews.com. This move by the Saudi prince is further evidence that Arab user members, and nations alike, are becoming one of the fastest growing groups to join the social network site. Also, in late November, the announcement of Twitter- from the Associated Press- joining forces with a highly successful Japanese IT firm, Mixi, Inc., has generated speculation that Twitter will actually have a stronger presence in the Japanese market than Facebook; with 52% of all Japanese internet-sharing usage sent by way of Twitter.
Mixi, currently ranked third place, once dominated the social networking platform in Japan; it was only until this year that Facebook made an impact in the country, according to an NPR report. More than 14.5 million users have visited Twitter, 11.3 million went to Facebook, and about 8.4 million visited Mixi. Despite its ranking, the company at the end of today's trading closed at a staggering $243,600 a share (and yes, you read that number correctly).
And speaking of global attractions, Derwent Capital Markets, a London investment firm, launched a hedge fund entirely devoted to public sentiment via social media content in an attempt to anticipate stock market prices based on positive or negative posts. The fund gained so much hype that the company received $100M in investor commitments - well beyond the initial $40M the company was seeking. This, by no surprise, has ruffled the feathers of other little birdies looking to flock to other social networks such as Facebook and YouTube for potential investment profits.
With that said, all this buzz about tweets being used for financial gain has led me to the question: If a company, and therefore its service or product, is profitable, then could that service or product be successful without the company’s namesake, capital, or even reputation backing it? I know this is a bit like asking the chicken-or-the-egg question but I think in this case it applies. If a company such as Twitter - which is privately-owned - can generate capital of nearly $1 billion based on its service alone, then can the service itself raise capital purely for public interest?
Public sentiment used as a means of investment strategy should be applied, at best, with loose judgment. The notion of twitter, or any other social platform, as a sound and prolific predictor of stock market movement is irrational. That’s like saying based on the number of “hmms” created from the sales of McDonald’s fries one can predict the next stock market crash; the product (or service) may not be a very accurate predictor of things to come. It would be more feasible as an indicator used to measure public reaction, but as an investment tool to predict change? I think not.
But if you’re the type of investor that goes for public sentiment rather than personal instinct, than that’s certainly your choice but be forewarned: like fashion, trends are neither always attractive nor fitting for everybody. I do, however, suspect that Twitter will go public and become a major player in the game of stocks but as of now hold your chips until then - now go and tweet that!