I have never been a fan of dot com stocks as they invariably go against Graham’s value investing approach.  They have very little in they way of tangible assets and are mostly loss making.  Investing in them seems to be somewhat of a gamble where everyone is waiting for the next Microsoft or Google.  It isn’t so much the companies that I dislike as investors attitudes towards the stock.  Yes some of these companies may i the future become highly profitable but does that mean the share price should be so over inflated today?

With the addition of social media companies to the stock market investors seem to have forgotten how their investments make money.  Take Twitter for example which despite announcing better than expected revenues saw its share price plunge by over 14% on the same day.  This was apparently due to it admitting it would struggle to grow its customer base.  It already has over 300 million accounts so is the size of its customer base really such a problem.  Surely it needs to work out how to monetise its existing customer base more effectively.  After all if the growth of the company relied purely on growing customer numbers eventually it would run out of steam.

The biggest problem is that if Twitter cant make a profit with 300 million users, how would having say 600 million make its situation any better?  It appears to only be making around $4 to $5 per user so surely increasing that to $10 would be reasonable.  If they could make such an increase in revenue without cost going up too much then it is easy to see that the company could become highly profitable.  I guess this is the kind of gamble some investors are willing to take.

Who knows whether Twitter will go on to be hugely profitable and some people will make lots of money.  I suspect that as with many other dot com stocks it will not be the case.  Its not that the company is no good, just that the stock is overvalued.  And the overvaluation must already be hurting anyone who invested just after Twitter floated and paid $70 for stock which is now only trading at $31.

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