x Abu Dhabi, UAEWednesday 24 January 2018

Just blowing bubbles

How can a company that doesn't make profits be worth billions? It's just history repeating.

One aspect of the modern market that continues to befuddle the general public is how a company that has never turned a profit can be worth billions of dollars.

And especially when the product is something as intangible as Twitter’s bursts of 140 characters, in which users as often post images of their lunches or share funny cat videos as relay information that has actual importance.

Market veterans are not surprised that Twitter’s IPO is likely to raise $1 billion (Dh3.67bn). A repetitive aspect of investing is that belief in a company’s potential frequently outweighs actual fundamentals.

Think of Dutch tulip mania in the 1600s, the South Sea bubble in the 1700s, the dot-com bubble of only a dozen years ago and right up to the US housing bubble that caused the global financial crisis. In each case, enthusiasm defied the reality on the companies’ balance sheets.

It is worth remembering that in all those cases, reality eventually won.

One wonders if Twitter will follow this pattern or emerge as a modern exception like Facebook. It had its IPO in May last year, after which its shares plunged in value but have since recovered. We’ll soon know from whether #IPOwin or #IPOfail begins trending on Twitter.