Twitter and Facebook share price frustration

The two companies, Twitter and Facebook, which have just entered the stock market, have recently performed unfavorably in the stock market. Their stock prices have fallen by 45% and 19% respectively compared with the highest levels in history. Some analysts pointed out that this is seen as a punishment for Twitter and Facebook, and such punishment may not be over.

The experience of Twitter and Facebook in the stock market is considered to be the result of an industry-recognized formula that uses the expected sales performance of the newly-listed company for the five years prior to the listing of the company's shares. Performance forecasting and estimation.

For market analysts, focusing on Twitter and Facebook’s sales performance is very important, because these two companies have the same opportunities as the majority of young companies at the expense of lost profits for more development opportunities and greater room for development. Twitter and Facebook have followed a similar path of “making a profit and losing money” in the early stage of corporate development. This makes it appear that the performance of the two companies in the stock market is not optimistic about the evaluation system based on how much revenue is the standard. This is a distortion of the performance of Twitter and Facebook in the stock market.

The significance of the existence of the calculation formula mentioned above depends on the two preconditions of the object being calculated. First, how fast is a company's revenue growth during the five years prior to listing? Second, what is the price/sales ratio of this company? (Sales here refers to sales per share)

Market analysts and investors now have a general understanding of the growth of the sales performance of US newly listed companies in the past, thanks to Jay Ritter, a professor of finance at the University of Florida and from the University of California, California. Professor Martin Kenney and his assistant, Donald Patton. The three scholars listed 1,700 U.S. companies listed between 1996 and 2007 as research subjects. Through the study, they found that the average increase in sales performance of enterprises listed as surveyed was as high as 212% (including Economic inflation factor). This figure is much faster than the recent increase in the sales performance of the entire US listed company. According to statistics, the S&P 500 company’s sales performance in the past five years has shown signs of decline.

What is the typical performance of a young company in terms of the sales rate? According to the data released by the market research agency FactSet, the median sales price of Dow Jones stock companies at the fifth year of listing was 5.87, while the current market rate of S&P 500 companies was only 1.64.

According to Ritter’s data calculation method, Twitter’s share price in November 2018 (ie, five years after Twitter’s listing) will be well calculated, which means that Twitter’s sales per share in the previous year is multiplied by 212%, which is multiplied by the market sales rate. 5.87. The above formula shows that in November 2018 (the fifth year after the IPO) Twitter's stock price may be 45% lower than the current level, and the resulting losses will be greater than the current loss of Twitter. The Twitter spokesperson declined to comment. Facebook will usher in its own market for five years in May 2017. Ritter’s data calculations show that its stock price will be 50% lower than it is now, and Facebook’s spokeswoman said it was unyielding.

How can Twitter and Facebook change the difficulties facing the future? The author stated that one way is to increase the sales scale of the company beyond the average level, or to further increase the sales rate. Ritter stated that both options are feasible and successful.

The author of this article, Mark Hulbert, is the founder of the Hulbert Financial Digest.