The hysteria surrounding the recent IPO of today’s social media darling Twitter sent chills through my Silicon Valley born-and-bred bones.
I worked at Apple through college and full time for several years. At the risk of dating myself, it was still called Apple Computer then, and it was common to see Steve Jobs wandering the halls and poking his head into meetings in rooms named after Star Wars characters. Jobs shared a belief with the leaders of most successful companies: If you build something great, they will come — more specifically, if you build a great product, they will buy. Jobs was certainly correct about Apple, which has gone from a small niche computer company to the second most valuable company in the world by creating innovative products that people didn’t even know they needed, and now, it seems, can’t live without.
It’s not rocket science to conclude that the most successful companies make something tangible. Take, for example, Tiffany and Co., the 176-year-old creator of the world’s most coveted diamond jewelry. In August of 2013, Tiffany reported in its second quarter a 16 percent rise in year-over-year profit and net income of $107 million. At its current share price, which hovers in the $83 range, Tiffany also pays a quarterly dividend of 1.65 percent, or $1.36 per share. Tiffany’s market cap is $10.55 billion dollars — about half Twitter’s current market cap. That might not be so scary if Twitter was raking in profits from selling your private information to advertisers via Tweets the way Tiffany is raking them in from selling you its spectacular diamonds, but Twitter, in fact, has never made a profit. In its recent IPO filing, the seven-year-old San Francisco-based startup revealed what most social media companies revealed before their IPOs: They’re growing fast, and spending faster. Twitter earned $253 million in the first half of 2013, but net losses were nearly $70 million. Though it might seem like everyone is tweeting what they ate for breakfast, in reality Twitter has just 200 million active users (by comparison, yesterday’s social media darling, Facebook, has more than 1 billion active users).
None of this, however, seemed to worry mom-and-pop investors, who drove Twitter shares as high as $50 on the first day of trading. At that price, Twitter was valued at more than General Mills, the 137-year-old corporation with a portfolio of more than 100 top-selling U.S. brands, including Betty Crocker, Yoplait, Pillsbury, Green Giant, Cheerios, and Häagen-Dazs. In September of this year, General Mills announced earnings for the first quarter of fiscal 2014: an 8 percent growth in net sales for a total of $4.4 billion. General Mills also pays a dividend, which investors have received without interruption for 114 years; the current payout is 38 cents per share, a yield of a little more than 3 percent.
I always believed in Apple, and I still do. That’s why I held onto my stock, adding to my position over the years during splits and dips. A few years ago I started getting calls from secondary market companies wanting to sell me shares privately held by employees at fledgling startups like Facebook, Zynga, Yelp, and Twitter looking to make some quick cash. “You could sell some Apple shares,” one guy suggested. “Apple is turning into a value company; it’s boring. These social media companies are the future.” I had to laugh. That’s what brokers were telling me in the late nineties about the dot-com startups, and we all know how that turned out. Like the last bubble, I made the right decision: Apple is up more than $300 a share and, like most “value stocks,” started paying a dividend; on the other hand, the prices social media employees got on the private market were higher in many cases than what those stocks now publicly trade for. Maybe someday, Facebook, Zynga, Yelp, and Twitter will make more money than Tiffany, General Mills, and Apple; then again, they could go the way of MySpace and eToys.com.
In 2005, News Corp. paid nearly $600 million for MySpace, which back then had more page views than Google. It was touted by M&A expert Tom Taulli as “one of the best acquisitions ever” in a Businessweek article that also suggested MySpace would grow by 20 percent per year. Unlike Twitter, Yelp, and Zynga, MySpace was profitable, but that changed quickly when fickle users moved on to Facebook and Twitter. In 2011, News Corp. sold MySpace for around $35 million, far below the $100 million it had hoped for, and less than 5 percent of its peak valuation.
In 1999, eToys.com was flying high and so was its stock. At $84.25 a share, the company had an $8 billion valuation — more than its largest bricks-and-mortar competitor, Toy “R” Us. Not unlike most social media companies, eToys spent a lot of money to grow its business and to stay relevant, racking up nearly $250 million in debt before going bust in 2001. Toys “R” Us also went through some tough times, even taking itself private seven years ago. This past May they pulled plans for an IPO, citing reasons including a drop in net sales. Not that they’re broke — in its most recent earnings report, the nation’s number-one toy chain reported net sales of $2.4 billion. That may sound like pocket change compared to the record $7.5 billion profit on $37.5 billion in sales that Apple announced during its most recent earnings call, but it’s still more than Yelp, Twitter, and Zynga have ever made — combined.