When a household name makes its shares available to investors for the first time, many people who normally steer clear of the stock market feel the urge to take part. This is perhaps particularly true of the high-profile internet and technology firms that America is so adept at producing. The stock market debuts of Facebook and Google, for example, attracted huge attention.
Facebook shares, for example, started falling almost the moment they became available, although they have recovered more recently and now trade above their flotation price. Google and LinkedIn, the social network based around professional relationships, have both produced respectable returns for shareholders, although they pale next to the gains that Apple and Amazon investors have enjoyed.
However, some once-famous online brands have suffered extreme falls from grace. MySpace and Bebo were once seen as serious rivals to Facebook. But in social networking there is no room for multiple competitors – everyone wants to be on the same network as their friends, rather than having to be members of several.
So as soon as one network gets an edge, everyone switches from the others. The winner rapidly gets bigger – as Facebook did – and the others wither away. MySpace fetched $580m (£375m) when Rupert Murdoch bought it in 2005 but was sold for just $35m in 2011. And in the summer Bebo was bought back by its founder, Michael Birch, for $1m just five years after he sold it for $850m.
This shows the dangers of backing technology brands on the basis of their fame alone. Fortunately for private investors, neither MySpace nor Bebo was a quoted company.
What lessons do the fortunes of these businesses hold for investors tempted to buy shares in Twitter?
The first point is that Twitter has no direct competition of the kind that Facebook faced in its early days – it created the market for short, instant online publishing and still has the market to itself. It has such a large number of subscribers – 300 million or so – that a newcomer would struggle to gain a foothold.
So the key to its financial success is whether it can turn its millions of tweeters into a profitable source of revenue.
“I didn’t buy Facebook shares when it floated because it hadn’t at that time demonstrated that it could make money from its huge customer base,” said Jeremy Gleeson, who runs Axa Framlington’s Global Technology fund. “But I did buy after it produced three good sets of quarterly results – evidence that it could make money from its huge traffic.”
Gleeson bought after the share price had fallen sharply. He said the increasing trend towards people using Facebook on their mobile phones, rather than desktop computers, was also a key challenge.
“At the time of the flotation a significant switch to mobile use was taking place, but Facebook hadn’t proved that it could deal with this trend and make money from mobile users. Now it has.
“I was worried that the innovations it made, such as displaying adverts to users as they browsed the lists of updates posted on the site by their friends, would be off-putting, but it hasn’t turned out that way.”
Tom Slater, who co-manages the Scottish Mortgage investment trust, also holds Facebook. “What continues to surprise is its size – 1.2 billion people visit regularly; this is a massively engaged audience,” he said. “The advertising industry is going through the process of working out how to use it.”
Slater also owns shares in LinkedIn. He said that he was attracted by its “disruptive” approach – the fact that it offers new ways to recruit employees and sell products that traditional companies in those areas cannot compete with. Mr Slater added: “Its 200 million white-collar members are incredibly attractive to advertisers.” He said its success was reminiscent of that enjoyed by “business to business” magazines in the past. Mr Gleeson also admires LinkedIn, although he said the shares were too expensive for him at present. “The business model is working nicely,” he added.
Gleeson added “Just like Facebook, it has lots of data, it can spot trends and what’s useful to people – all potentially very valuable to advertisers. The process of exploiting this is at a relatively early stage but Facebook has demonstrated that there is an appetite for this kind of content.”
He added that Twitter was “not as far along the road” as Facebook but “there is no reason why it shouldn’t get there”.
“I could see the potential in Facebook when it floated but there were too many uncertainties,” he said. “Twitter’s float sounds like a carbon copy.”
