Market Mad House

In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. Friedrich Nietzsche


Is Twitter Making Money?

Twitter (NYSE: TWTR) is putting the social media business plan of build the platform first, make the money second, to the test. The problem is that Twitter still is not making that much money.

The controversial social media network reported an operating income of $74.19 million and a net income of $61 million on March 31, 2018. Okay that was better than the -$61.56 million net income and -$40.28 million operating income reported a year earlier.

Therefore Twitter is surprisingly and suddenly making some money for the first time in recent memory. The amount of money it is making is limited but Twitter is actually making money.

Twitter reported a gross profit of $442.05 million and revenues of $664.87 million for 1st Quarter 2018. The platform is finally turning a profit, even though it is nowhere in the leagues of Facebook (NASDAQ: FB).

Is Twitter a Value Investment

Some observers will wonder if the sudden appearance of income makes Twitter a value investment. After all its shares were trading at $43.31 on July 23, 2018, while Facebook were trading at $210.91 on the same day.

I would say no because Facebook, had a free cash flow of just $151.35 million and an operating cash flow of $242.67 million on March 31, 2018. Facebook, is not generating that much cash for a technology company.

The reason a person buys a tech company like Alphabet (NASDAQ: GOOG) or Microsoft (NASDAQ: MSFT) is that they generate a lot of cash. At the end of the day, Twitter simply does not have much cash.

Twitter reported $1.601 billion in cash and equivalents and $4.529 billion in cash and short-term investments on March 31, 2018. Facebook reported $12.082 billion in cash and equivalents and $43.956 billion cash and equivalents on the same day.

WhatsApp not Twitter is the Real Value

Nor is Twitter’s social network that valuable, Twitter had just 336 million users at the end of 1st Quarter 2018, Statista calculated. That was a modest increase over 1st Quarter 2017 when Twitter had 327 estimated users.

In contrast, just one Facebook property WhatsApp the encrypted messaging service had 1.5 billion users in December 2017. Statista calculated that WhatsApp added around 300 million users or nearly as many users as all Twitter over the course of 2017.

Reportedly WhatsApp started 2017 with 1.2 billion users in January and finished with 1.5 billion users. WhatsApp is capable of adding that many users because its market is in the developing nations where most of the world’s people live.

Peer to Peer Payments is Social Media’s Future

More importantly, Facebook has started monetizing the encrypted messenger with WhatsApp Payments.

WhatsApp Payments is a peer-to-peer money transfer app that is being tested in India. It is very similar to PayPal’s (NASDAQ: PYPL) popular Venmo which is only available to Americans.

WhatsApp Payments can make money by charging a small fee on each transaction. It came out in India at the right time, the number of users of Indian payment app Paytm grew by 105% between January 2016 and November 2017, Forbes estimated.

Paytm’s fast growth was a result of Indian Prime Minister Narendra Modi’s clumsy demonetization attempt on 8 November 2016. Modi abruptly declared India’s two largest banknotes, the 500 rupee and 1000 rupee bills worthless.

That drove tens of millions of Indians to seek a cash alternative. By 7 May 2018, Paytm alone had 300 million users, Expanded Ramblings calculated.

This is why both WhatsApp and its competitor Telegram are getting into the P2P business. Telegram has been famously proposing an initial cryptocurrency offering (ICO) of its proposed Telegram Open Network (TON) or Gram altcoin.

Why Telegram Might be Valuable than Twitter

The idea behind the TON ICO which has been valued at $1.7 billion is to create a totally private and encrypted P2P solution. The Gram would form the basis of an alternative blockchain financial network that would be available through Telegram.

The privately-held Telegram had 180 million users in December 2017, Statista calculated. That’s a smaller footprint than Twitter, but it is potentially far more valuable for a simple reason.

Most of Twitter’s value is based on its popularity with journalists in the English-speaking world particularly Americans. Since most American journalists are neither well-educated; nor particularly tech-savvy, this not a good recommendation.

President Donald J. Trump (R-New York) uses Twitter because journalists pay attention to it. If journalists stopped using Twitter, Trump would quickly lose interest in Tweeting.

Telegram and Twitter’s values are based on Reputation Only

Telegram in contrast to Twitter, is largely used by well-educated, tech savvy individuals outside the United States. Tellingly, many of them are cryptocurrency enthusiasts.

Telegram might be valuable than Twitter because it is on the cutting edge of tech. Although as a utility, there is little difference between Telegram and WhatsApp. Most of Telegram’s appeal rests on the fact it is not owned or controlled by a large corporation.

Therefore Twitter’s popularity is driven by publicity and Telegram’s by hysteria. Neither of those attributes makes a value investment. Instead, they point to products purely based on reputation.

That means, either network’s value can disappear overnight if the reputation vanishes. At the end of the day, Facebook is the value investment in social media because it is generating a lot of cash.

Twitter demonstrates that having a large social media footprint does not create a value investment. Only services generating a lot of cash are value investments.

Stay away from Twitter and Telegram, because neither company has demonstrated they can make money. Currently, Facebook is the only good investment in social media even though it is overvalued.

At $210.91 Facebook is still a better stock than Twitter is at $43.31 a share. The moral of the story, is that social media is one investment that’s not for the Faint of heart.