Here's Why Twitter Made a Mistake Going Public... Also, Stock-Based Comp and an Update on My Newsletter's Portfolio

This originally ran at?Empire Financial Research.

? I was in the camp that social media giant Twitter (TWTR) was making a mistake going public well before its initial public offering ('IPO') in 2013...

I reiterated my thoughts in 2014, in a?story?headlined, "Is Twitter a Victim of Wall Street?" when I wrote...

As a public company, it can't get from here to there without the type of scrutiny – pegged to a stock price – that could demoralize executives and employees who are suddenly put on the defense when all they are trying to do is create and improve something they believe is great.

A year later, as Twitter started to get pulled through the muck, I?tweeted...

While the link to that article posted on LinkedIn is no longer live, I wrote that...

"Companies caught in that bind of going public too early – especially if they're as highly used and high profile as Twitter – risk becoming the punching bag for investors, commentators and just about anybody and everybody else who has an opinion. (Yours truly, included.)

"For management, employees, and other stakeholders, the controversy over Twitter the stock becomes disruptive and distracting – just when disruption and distraction is needed the least.

"The reality is this: Twitter is an evolving enterprise that cannot be fixed in one quarter, two quarters, or three quarters. Its future business model is likely not to be its current business model."

I added...

"It will always be compared with Facebook, even though they are two distinctly different businesses that happen to be in social media. There will be calls for its CEO's head, which is kind of silly because it's unclear anybody else could do a better job.

"There will be calls for an activist to arrive on the scene, which is absurd, because that's the last thing Twitter needs right now. (See above on distraction.)

"And there will be calls, such as mine, for the company to be sold in a friendly deal orchestrated by management.

"That's probably its best shot to create the strategy that ultimately will keep everybody's eye on Twitter the service as opposed to Twitter the stock. That latter point – the stock versus the service – is often missed in the message of Wall Street. All too often investors confuse the two, and in the case of Twitter it's too bad because I would hate to see the focus on the stock lead to actions that negatively impact the service."

??All of which gets us where we are today...

On the plus side, despite a few rocky years, Twitter's share price today of less than $50 is considerably higher than the IPO price of $26, while annual revenue since then has more than quintupled. And by going public, the company raised cash to hire and grow.

On the flip side, Tesla (TSLA) CEO Elon Musk's bid (real or not) has put the company in play. Since Twitter is public, as expected, its executives and employees now have the "fun" and possible demoralization of not only being distracted by a possible tug-of-war over control of the company, but also – more important – what a possible buyer thinks the service should be... and how many fewer employees it needs.

I stand by what I said originally: Twitter never should have gone public.

Given everything that has been going on, it very well might not be for much longer.

??Meanwhile, no sooner did I write?my essay last week?on the effect of falling stocks on stock-based compensation than my friends at Kailash Concepts published their own?take, and it's a doozy...

From the report...

As we can all agree: compensation expenses, including share based payments, are an operating expense. Despite the rule change, regulators inexplicably allowed these payments to be added back in the cash flow statement. This nonsense distorts financial statements' ability to explain a firm's actual profitability.

Friends. This just is not that complicated. When a company issues stock to employees?or?the public it increases shares outstanding and dilutes earnings per share.

Give the stock to the employee and the cash doesn't show up on the balance sheet. Robbing Peter to pay Paul. In broad daylight.

Or... smoke and mirrors. That's certainly the case while stocks of these companies – many of them profitless – are rising.

But when stocks are falling, it's just the opposite. This chart from Kailash shows what has happened to the market cap of firms with?stock-based comp of greater than 33% of their revenue...

Here's Why Twitter Made a Mistake Going Public... Also, Stock-Based Comp and an Update on My Newsletter's Portfolio

??Speaking of stock-based compensation, here's a comment from the mailbag...

As reader Keith M. writes...

"Not enough people consider, or write about, the impact on cash flows from the repurchase of shares that is necessary to prevent dilution from exercises of stock options. For example, over a 10-year period, UnitedHealthcare spent about $18 billion to buy back about the same number of shares they issued for options exercised during that period. The options exercised only brought in about $1 billion.

"That math is simple. Using options in lieu of cash can have a significant?negative?impact on cash flows, in the long term. Growth companies increasing the amount of cash compensation in lieu of options could be?preserving?cash flow, in the long run."

That's an interesting way of looking at it, Keith... Thanks for the perspective!

??Finally, an update on the portfolio of my paid newsletter,?Herb Greenberg's?Investment Opportunities...

We launched with the initial portfolio just at the peak of the most recent cycle, with a goal of outperforming the market over the next two to five years.

So it's no surprise that the?Investment Opportunities?portfolio has mirrored the market. But... despite the market's malaise over the past month, one of our stocks is up around 20%, while another is up 13%.

We're not looking for quick trades – in fact, we believe both stocks have more upside from here. But it's a reminder that even in long-term portfolios there can be short-term winners. If you're not already a subscriber, you can find out how to gain instant access to the full portfolio?right here.

As always, feel free to reach out via e-mail by?clicking here. And if you're on Twitter, feel free to follow me there at?@herbgreenberg. My DMs are open. I look forward to hearing from you.