Twitter's Trials and Snap's Success: Is Silicon Valley Too Dependent On 'Momentum?'

Live by hype, die by hype. JL

Steven Solomon comments in the New York Times:

Momentum can mint money in Silicon Valley, but you have to sustain it. The fickle gods of Silicon Valley will turn if the company can’t sustain its growth story. Once again Silicon Valley’s overreliance on momentum creates an unrealistic proxy for valuation. Snap will reap billions as a result, while Twitter will struggle to salvage what it can from what was once a valuation of more than $40 billion.

Momentum can mean everything when it comes to the fortunes of social media giants. Just look at Twitter and the company formerly known as Snapchat.

In Silicon Valley, if you are not a hero, you are a loser. And this all-or-nothing narrative is driving the fates of companies beyond all reasonable expectations.

Negotiating a deal in the open is never a good thing, but it may be worse for Twitter.

For one, the reports of the (failed) Salesforce negotiations come on the heels of reports that others, including Alphabet, Google’s parent company; the Walt Disney Company; and possibly even Microsoft had taken a look at Twitter and decided to pass. All of this reduces whatever leverage the micromessaging service, which has a market value of more than $12 billion, might have possessed before the frenzy of deal speculation began.

Any way you look at it, it’s not a great place to be for Twitter.

The company’s fundamental problem is that it is struggling in user growth. Twitter said in its Securities and Exchange Commission filings that it had 313 million average monthly active users for the three months ended June 30, up 3 percent year over year.

Revenue growth may be on track, increasing about 20 percent in the quarter ending June 30 over the same period of last year, but it is the user growth numbers that have put Twitter into the loser category.

When Twitter went public in 2013, and its stock price shot to over $60, it had far fewer users and a third as much revenue. But back then, Twitter had user growth of 39 percent year over year. And with that growth, all other sins were overlooked.

That is why LinkedIn could command $26.2 billion in its sale to Microsoft. LinkedIn has 450 million members but only about 106 million monthly users, far fewer than Twitter. Yet the growth is there: Membership had increased by 18 percent year over year as of June 30.

It’s the secret sauce of internet valuations. Revenue and earnings are forgiven if you can show growth in users. Whether that makes sense, of course, is another matter.

It does explain the puzzle of why Twitter struggles to sell itself and LinkedIn goes for a huge premium. In short, the story line isn’t clean at Twitter, and the growth is not phenomenal. Even though by some metrics Twitter is worth more, it has failed to adequately find a way to make money from its user base. Other Twitter properties like Vine are also struggling with no or low growth.

Still, the gloom around Twitter seems overblown. Twitter is an important part of the internet, and even Yahoo found a buyer willing to pay $4.8 billion despite being in slow-motion collapse. A figure twice that high for Twitter would seem to be a bargain. And remember that Facebook faced issues after its initial public offering, but was able to find solid footing in mobile.

Sharp leadership — whether that is from its chief executive, Jack Dorsey, or new blood — could certainly help Twitter exploit its huge user base.

But the problem is that in the eyes of the Valley, Twitter has lost its mojo.

Even as Twitter was deflating, another social media darling, Snapchat, now renamed Snap, was riding high as reports emerged that the start-up, known for its disappearing messages, was preparing for a public offering that could value it for as much as $25 billion.

Snap reports 150 million active users daily and 235 million monthly with growth rates of 30 percent — roughly the growth rate of Twitter at its public offering. And Snap has the youth market, which advertisers covet. Revenue is low, at about $376 million, according to Bloomberg, but is projected to grow fourfold by 2018. Profits appear nonexistent, but as usual, who cares?

A $25 billion valuation would be about 25 times its projected 2017 revenue. In comparison, Facebook went public in 2012 at 19 times revenue, which at the time was considered a rich valuation.

It’s easy to be skeptical about such a rock star valuation. Snap lives and dies on the fickle under-30 crowd. At any time, the youth of the world may turn to another product. (WhatsApp appears to be increasingly popular among the tween crowd, for example.) And Snap has no pretensions of being useful or changing the world. It is simply about having fun. So Snap has quite a few risk factors beyond those of Facebook.

There are, however, only a few big social media companies left. The rest have been bought up by Google, Microsoft and the like. And Snap has the growth.

The question is whether Snap can sustain its messaging business and turn into another Facebook or Google, justifying that $25 billion valuation. So far, Snap has worked hard to keep its product nimble and updated, and it has retained users.

The start-up might have just gotten lucky with its messaging product, but there is a clearly a belief at the moment that its co-founder and chief executive, Evan Spiegel, can be a visionary like Mark Zuckerberg of Facebook and push successfully into new products.

Momentum can mint money in Silicon Valley, but you have to sustain it. Snap, if it manages the public offering process right and isn’t too headstrong with the markets, may get the valuation it seeks.

Yet the fickle gods of Silicon Valley will turn if the company can’t sustain its growth story. You can debate whether maybe it might be better to question that potential at the public offering stage, but then people will point to Google and Facebook as success stories. How could you not invest in Snap?

Once again we have a case in which Silicon Valley’s overreliance on momentum creates an unrealistic proxy for valuation. Snap will reap billions as a result, while Twitter will struggle to salvage what it can from what was once a valuation of more than $40 billion. It is a story that will have real consequences.