Why profits and shares at Twitter and Facebook are heading in opposite directions

Author

Katherine Rushton

October 30, 2014

Twitter lost more than $3.5bn in value despite good results, while Facebook shares tumbled nearly 10pc even though it made profits of $1bn

Silicon Valley is a land of big numbers.

Every man and his dog seems to have a million-dollar deal in the works. Loss-making companies like WhatsApp and Instagram sell for billions. The bosses of Twitter and Facebook mean what they say when declaring they want to reach every person in the world.

The scale of their ambition is inspiring, especially when they deliver. Many technology companies fall through the cracks but the behemoths – Facebook, Google and Apple – seem to have a Midas-like ability when it comes to cash.

Apple made $8.5bn in the third quarter alone. Google delivered $2.8bn. Then, on Tuesday evening, Facebook nearly doubled its profits to $1.1bn . Not bad from a business that spent its first year as a public company underwater because investors were worried about its ability to make money. It cruised past analysts’ forecasts. In fact, all three of them did.

Twitter was not on quite the same impressive scale, but the social media business still managed to meet the top end of expectations, as its user base swelled to 287m active users each month.

One might reasonably expect those sorts of results to drive share prices sharply upwards, but for some companies the opposite was true.

Twitter lost more than $3.5bn in value on Tuesday, as investors digested results that were in line with forecasts, instead of smashing them out of the ballpark. Facebook tumbled nearly 10pc in after-hours trading on Tuesday evening in New York, amid disappointment that it hadn’t beaten Wall Street expectations by a larger margin.

Perhaps it is the companies’ own fault. Many Silicon Valley giants are deliberately cautious about their predictions, so they can deliver shareholders a happy surprise on results day. In doing so, they have created a beast. Investors have now come to expect these companies to smash through their own forecasts, quarter in, quarter out. Merely doing what they say is a disappointment.

Or perhaps what we are actually seeing is some air easing out of the frothy technology market. In the first half of the year, a strong set of results would frequently send shares in the industry’s giants up by 10pc or more – no mean feat when we are talking about multi-billion-dollar beasts. That fervour has now cooled.

Shareholders are pulling significant investments from companies that have delivered solid performances, on shreds of negative information, and yanking even more from those that have a rocky quarter.

Let us just hope that this is the slow deflation of a technology bubble, and not a sign that it is about to burst.

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