Monday, May 05, 2014

Would Warren Buffet buy Twitter?

A rhetorical question since the Sage of Omaha has already answered it by not buying Twitter. Still, as we read obituaries of the service, not yet 10 years old, plus hagiographies arguing it is a "must read", I think it's worth taking a step back and looking at this as an investor, and also welcoming Silicon Valley to Hollywood at long last.

First, Buffet assesses business by considering whether they will be around in 20 years (thus demonstrating sound management and a defensible market position) and then looking at whether the likes the price (all stocks go through ups and downs). I don't think Twitter does well in the 20 year test because, given how quickly markets change, and how easy it would be to replicate a Twitter like service (or even improve upon it! Twitter++ would be like Twitter was in the early days before it got "popular") the chance of it existing as a stand alone public company are pretty slim. Maybe Google or Facebook may buy it, and now you're playing M&A arbitrage, not investing, but from a pure value, DCF stand point, it's future looks pretty cloudy.

Secondly, many of these hot mobile B2C companies are essentially entertainment products: SnapChat, Facebook, Twitter, King (most obviously), and so are vulnerable to the same vagaries of fickle consumer sentiment as the rest of the entertainment industry. Not to say that great brands and businesses cannot be built in the entertainment space, they can, but the novelty sector is a difficult one and very far afield from the infrastructure and platform businesses that are currently funding, directly or indirectly, their more glamorous, consumer oriented brethren.

I overstate my case. Facebook is not Candy Crush Saga. But I can see the novelty wearing off, and/or something new and shinier coming along for people to go to for social entertainment.

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