On Twitter and Short-Term Stock Fluctuations

Twitter has had a rough few weeks, but does that mean it’s destined to spiral downward?

Hell no.

18% stock price drops are great for headlines, but they certainly don’t tell the story of a company’s long-term trajectory. So let’s get the obvious out of the way: Twitter’s getting punched in the gut at the moment:

After a steady rise to over $45, shares in Twitter have plummeted to just a hair under $32. Ouch. It stings just a bit more when you read the news stories about today’s 18% drop particularly, thanks to the end of the IPO lockout for insiders at the company. Here’s one quote from USA Today:

“Even without a secondary offering, millions more Twitter shares will be coming onto the market now that lock-up expirations have begun. That additional dilution may mean even more pain for Twitter shareholders in the weeks or months ahead.”

That’s fair. That’s potentially accurate. But the key phrase here is “weeks or months” — not “months or years”. Everyone seems to forget a couple of key facts about tech companies just after their IPOs:

  1. Stocks go through massive fluctuations during their first year on the public market as employees, management and investors adjust.
  2. It takes time — a lot of time — for a company to start realizing returns from the money it raises during its IPO, whether that’s in the form of revenue, users or stock price.
  3. One day and one week drops are horrendous predictors of a company’s success.

I remember the headlines about Facebook after it started tumbling after its IPO. Today, everyone’s raving about how it’ll be on the most valuable companies around by 2020.

Do you remember how long it took Facebook to really hit its stride in the stock market? The answer is over a year:

Facebook needed time to adjust to the market, and the market needed time to adjust to Facebook. And since then, Facebook has blossomed (as has LinkedIn and many other large social networking offerings). With that IPO money, Facebook was able to pull the trigger on Instagram, which has turned out to be one of the best acquisitions of the last decade. Twitter just made a big acquisition itself, MoPub, which needs time to develop before we can render a verdict.

So while we breathlessly panic about Twitter’s stock drop, don’t forget about the big picture. Twitter’s fundamental revenue numbers are growing and the company has plenty of time to make its core product appeal to a wider audience and monetize that audiences (or monetize audiences everywhere with MoPub).

So while the next few weeks and months may continue to be choppy, I’m long on Twitter, because I believe in its leadership (particularly Dick Costolo) and I believe that it has the fundamentals to succeed. All it takes is one positive quarterly report to turn a downslide into an upswing.

Image of a Mountain Bluebird courtesy of Wikipedia.