Think twice about value before investing in the next hot tech startup

Shares in even the most disruptive company, like Twitter, aren't worth buying if they're priced too high

By Aaron Elstein

Jun 16, 2015 @ 4:51 pm EST

Let's suppose you were one of the lucky few who invested in Twitter back in November 2013 and got in at the initial public offering price of $26 a share. Sure, you've had a few bumps and bruises along the way, but through it all Twitter's business has grown pretty nicely, and its stock had risen 38% since the IPO, to about $36, when Chief Executive Dick Costolo announced last week that he would resign.

Now, 38% is a great return in less than two years. (Again, this assumes you bought at the IPO price. Most people couldn't — and paid much more that November day, about $45 a share, because of all the hype surrounding the Twitter offering.)

But here's the thing: You could have made more money investing elsewhere. In fact, people who invested in old, allegedly dying businesses like bookseller Barnes & Noble or financial publisher Value Line have done better than Twitter shareholders since the tech darling's IPO. B&N;'s shares are up by 75%, and Value Line's by 48%.

Truth be told, a quick trip to the Bloomberg terminal last Friday produced a list of 37 companies headquartered in or near New York whose stocks have done better than Twitter at its IPO price. They include G-III Apparel, a company based in the garment district since 1956 that makes clothing under such famous labels as Calvin Klein, Kenneth Cole and Cole Haan. This old-economy stock has risen 140% since Twitter's IPO. Or, which is up 104%. Martha Stewart Living Omnimedia, up 65%. Avis-Budget, 62%. Revlon, 59%.

OK, we've had our fun, but there's a message here, and it boils down to this: Shares in even the most disruptive, Zeitgeist-changing company aren't worth buying if they're priced too high. Likewise, shares in fuddy-duddy companies — even booksellers or old-school publishers — can pay off nicely if the price is right.

What price is too high and what's cheap? It's hard to know. Indeed, only a few investors consistently figure it out. They tend to have names like Warren Buffett or George Soros.

The single hardest aspect of playing the markets is setting aside your personal feelings for a company or product and trying to fairly map out its future financial performance. There were ample reasons to avoid Twitter from the get-go, starting with the fact that it was valued at 40 times revenue at its debut, compared with 17 times for Facebook and seven for Google.

That means the stock was priced way too high relative to its growth capacities, and management has struggled to meet the investment world's expectations ever since, even though annual revenue more than doubled last year, to $1.4 billion.

The next time you consider chasing the latest hot new-economy thing from Silicon Valley, ask yourself this: Is there something else I could buy for cheap, like, for instance, a bookstore?

A version of this article appears in the June 15, 2015, print issue of Crain's New York Business.

Join the Discussion

Most Popular

Affluence Influencers

// load addthis social plugin // responsive video resize