Think Twitter Stock is Safe? This Will Change Your Mind
Twitter, Inc. (NYSE:TWTR) investors must be feeling gleeful, as shares of the social media company have soared more than 25% since the end of August. But behind the glitz and popping champagne corks, one trend should be keeping Twitter stockholders up at night.
The bizarre logic of finance has seen Twitter stock gain as much as 5.5% in the markets last week even as the stock lost some 16% since the start of the year. But there is little to celebrate. The reason for the leap may have more to do with announced layoffs at Twitter than new products or sources of revenues.
Twitter said it would be laying off 336 employees worldwide, or eight percent of the workforce. The social network appeared to be set to rival Facebook at one point. Has it reached a crisis point? After all, the layoffs are rather an unusual move for the company considering the course of its past nine years of operations. This could have an effect on morale—and performance—affecting Twitter stock.
If You Own Twitter Stock, You Need to Read This
Jack Dorsey, Twitter’s new CEO, tried to reassure employees and shareholders alike, promising third-quarter 2015 revenues between $545 million and $560 million. He also assured those losing their jobs, along with “survivors,” that Twitter will take care of everyone with generous severance packages and help them look for a new job. (Source: Shawn Knight, “Twitter to lay off more than 300 employees as part of internal restructuring,” Techspot, October 13, 2015.)
Former Microsoft boss Steve Ballmer sweetened the layoff pill as he said he would buy a big chunk of Twitter stock. Ballmer’s investment comes just as Saudi Prince al-Walid bin Talal and his Kingdom Holding Group Company (KHC) announced on Friday that it consolidated its position as Twitter’s second-largest shareholder, adding to its position in the social network’s stock.
Over the past six weeks, the Saudi magnate and KHC have taken just over five percent in Twitter (with 34,948,975 shares). The Prince and the former Microsoft CEO and current president of the LA Clipper basketball team have helped Twitter trade in the $30.00 to $31.00 range, which is well above the average of the past three months. Social networks are popular in Saudi Arabia, where traditional media are under strict control of the authorities.
Ballmer and al-Walid have also shown that while Twitter has doubters, the microblogging company is still able to generate enthusiasm. Ballmer owns four percent of the U.S. social network and he actually owns more shares than owner-founder and CEO Jack Dorsey. Ballmer reportedly paid $800 million to acquire four percent, trailing al-Walid, who owns five percent of Twitter. Evan Williams, Twitter co-founder, still owns the largest share at 6.9%.
Prospects for Twitter Stock
With a single tweet, Ballmer has earned nearly a billion dollars to Twitter. Paradoxically, the millionaire does not yet have a verified account on the social network. Twitter is slated for a bounce-back. As Steve Ballmer’s tweet states, “Good job @twitter, @twittermoments innovation, @jackCeo, leaner, more focused. Glad I bought 4% past few months. Like @alwaleedbinT move too”.
This may be the signal, if not the trigger of growth. Last week, Twitter shares were agitated by the layoff announcement. But the move reflects the new CEO’s efforts to better monetize the social network. Twitter is testing new solutions, including changing its almost iconic 140 character limit.
Ballmer is sure to be an influential shareholder. As CEO of Microsoft for more than a decade, he has become one of the most influential people in Silicon Valley and his share purchase has come just as Twitter needed it most. Nevertheless, the doldrums from which Ballmer and al-Walid have lifted Twitter are symptomatic of a wider problem in Silicon Valley.
Something has happened to the dream. The CEOs of tech stocks have suddenly awoken from their California dreaming with a bit of a hangover. The party has been losing steam as suggested by a considerable restructuring of the workforce at various companies in the Valley. Moreover, investors should be careful or at least concerned.
Job Cuts Throughout Silicon Valley
Twitter’s layoffs are just one of the many small signs that many companies in the tech sector are catching a flu. Fortune Magazine pointed out that of the deepest job cut measures in 2015, two tech companies; including Hewlett-Packard Company (NYSE:HPQ) (the second), and Microsoft (the seventh). (Source: Claire Zillman, “The biggest layoffs of 2015 so far,” Fortune, October 2, 2015.) Hewlett Packard is moving ahead with splitting the company into two: one specializing in servers and software, and the other focused on computers and printers.
The first of these will lay off some 30,000 employees (10% of the total), notwithstanding the fact that the group is just recovering from 54,000 cuts made three years ago. CEO Meg Whitman warned that these could still grow. Microsoft, meanwhile, is paying dearly for its ambitious purchase of Nokia. So, it is no surprise it announced the dismissal of 7,800 workers in the telecom sector. And that’s not all, folks!
Microsoft and HP are huge companies with massive overheads and production facilities such that layoffs might be rare—but at least expected. This isn’t the case when it comes to companies like Snapchat. (Source: “Snapchat CEO Reveals Why He Rejected Facebook’s $3 Billion Offer,” Mashable, January 6, 2014.) Facebook has long courted the former startup. Now, Snapchat looks rather arrogant as it is forced to cut fifteen people.
QUALCOMM Incorporated (NASDAQ:QCOM), the world’s largest maker of computer chips, turned into a financial giant thanks to the worldwide popularity of smartphones. This company may also be due for some pain. Samsung, for example, has decided to let go of Snapdragon due to a significant drop in demand. Not to mention the fact that the company has to pay $975 million in fines for breaking Chinese antitrust rules. The result is that thousands of workers are at risk (10% of the total).
Is Silicon Valley At Risk of a Bubble Burst?
The staff cuts are the first sign of a potentially deeper problem in Silicon Valley, one that faces the previously unthinkable risk of a bubble. Peter Cohan, a startup expert, has considered the performance of initial public offerings (IPOs) in 2015. Over half of these were not covered while yields dropped four percent. The sector experienced its first negative quarter since 2011.
The industry fears the fear is a repeat of what happened in the mid-90s, when several companies linked to the Internet, after growing at exponential rates, failed miserably in what was called the “dot com” bubble. Today, the atmosphere is very similar. While U.S. companies with a rating of over $1.0 billion a few years ago were a rarity, now, according to the New York Times, there are 107 of them.
Uber might be a victim of that bubble even before formally launching its IPO. Its current value is untenably high. Just like in the 90s, the market is replete with madness, and people are willing to be paying exorbitant sums, thus fueling the bubble. Meanwhile, in the backdrop of continuing high salaries—on average twice as high as the rest of the U.S.—the shadow of layoffs is a disturbing trend that should be watched closely as an early warning sign. This is an eventual alarm signaling the bubble’s bursting.