By November 6, 2013 Read More →

User numbers do not equal tech profits, warns SEC

From today’s FT:

The top US securities regulator has warned that technology companies with lots of users will not always translate them into large profits, in comments that appeared to be timed to coincide with the eve of Twitter’s much-anticipated initial public offering. Mary Jo White, chair of the Securities and Exchange Commission, questioned whether investors could understand a company’s future prospects when they were bamboozled by the “sheer magnitude” of user numbers that might bear no relation to profitability.

Although she did not name Twitter specifically, the speech at a gathering of securities lawyers in New York comes at a crucial time for the unprofitable company, which could be valued at as much as $17.4bn when it goes public on Thursday.

This story brings back some unpleasant memories of the dot-com meltdown in early 2000. In the late 1990s, when dot-com mania was at its peak, analysts were looking for anything that might justify high market caps for companies with few revenues and absolutely no history of profit. Remember “eyeballs” and other suspect metrics? Twitter is a far stronger company that just about anything available back then, but its pending IPO is a timely reminder that there is no substitute for cash flow.

Posted in: Valuation

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