It would seem fair if Twitter Inc (NYSE:TWTR) were to share. The company’s initial public offering was a staggering success, of course. Priced at $26, the stock closed its first day of trading at $45 per share. The company was thus endowed with a market capitalization of $25 billion. The company has no earnings, but who cares. Adding back non-cash charges to produce earnings before interest, taxes, depreciation and amortization, then adding back the financial value of non-cash employee compensation, the company can be regarded as profitable. Such a number for 2013 may approximate $50 million or so. The company is valued at 500 times such results, which exclude expenses that do have economic value. Correctly accounted, the company makes not a dime. But who cares when circumspection is the investment equivalent of tuberculosis.
It should be obvious to everybody by now that such stock market largesse is made in Washington. The specific address is the Eccles Building on Constitution Avenue, home of the Federal Reserve. In fact as citizens and U.S. taxpayers, we think it would be an expression of gratitude if Twitter were to take a little pressure off of the Fed and buy some Treasury bonds themselves. But that is not our remit, the company would reply. We are here to, well, Twitter.
Happily, not all members of the U.S. government are as pleased as the central bank to induce investors to behave foolishly. On the eve of Twitter Inc (NYSE:TWTR)’s IPO, Mary Jo White, chair of the Securities and Exchange Commission, offered cautionary remarks on investing in complex or inchoate technology businesses. The stock market ignored her, but her comments were well chosen.
We have seen this all before and it ends badly. Ms. White’s remarks were presumably pollinated by the lessons of history. By coincidence, in the same week that Twitter completed its offering, another tech firm reported disappointing earnings. That firm was Cisco, which was one of the belles of the stock market boom of the late 1990s. By the peak in early 2000, Cisco Systems, Inc. (NASDAQ:CSCO) was valued at about $500 billion, which was 200 times the company’s then earnings. An impressive valuation, also. But back then, Cisco and brethren were going to change the world. Sort of like Twitter Inc (NYSE:TWTR) today. Chart 1 is Cisco, tracing out the dreaded where-the-Rocky-Mountains-meet-the-Great-Plains stock price pattern.