So Much for Science and Rationality

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On the opening day (11/7/13) of its IPO, Twitter shares (TWTR) traded up from its offer price of $26/share to $45/share.  By contrast, Facebook (FB) opened (5/12/13) at $42/share and promptly began to train downward for many months.  Facebook has since then been trading up for several months ($47 today), which is indeed good to see.  However, the contrasting stories of the initial IPOs paint an interesting picture.

Twitter is yet to post a profit, and reports around $650 million a year in revenue.  Facebook, by contrast, reports almost $2B a quarter in revenue, and has been profitable for three straight years.  So, if one were to base share price and company potential on numbers and data, Twitter is a fraction of the company that Facebook is.  But so much for science and rationality.

It boils down to investor mood, sentient, and emotion.  Investors were skeptical and still on the sidelines at the time that Facebook went public.  This week, when Twitter went public, investor mood is all champagne and bubbly.  Markets have been up for weeks, the Dow reaching record highs almost daily.  But this does not mean that Twitter has greater potential as a company going forward.

Such is the nature of much decision making in the corporate world. For all of the bluster and infographics about the importance of data and big data, humans are still primarily an emotional species.  We aspire for rationality, but we have to learn it and fake it.  Our default setting, for better or worse, is emotion. Recognizing such a simple thing would save us a lot of time and angst.

Source: Drew Jones Daily Drip

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