Junk bonds are risky - and as a result have a very high yield. High that is, if they are ever paid off. You can lose your entire investment.
As I have noted before, getting investment advice from the media is risky. Analysts will come on the television and shout "BUY!" or "SELL!" or say idiotic things like, "Well, Jim, my target price for Twitter is $50 a share!" - but they don't explain how the came up with that number (pulled from their ass) and why such a "target" makes sense. And yes, analysts have been known in the past to be paid by companies to hype their stocks. Yet a surprising number of people listen to these boobs and think, "Gee, I'd better get in on this hot stock tip! After all, only me and a few million people who watched his show even know about this!"
Ignore things like buy or sell recommendations, or "target prices" - they are largely meaningless. If you really want to understand how a company is doing, you have to dig through a lot of numbers. And odds are, you don't have the time, access, and resources to really do this, so stay away from stock picking - at least as a major component of your portfolio.
Can they dig themselves out of a hole like this? Only if profits double - and then some. And that still doesn't address paying back all that debt!
Or in six years, they found a way to double the user base, or double their ad revenue, or cut their operating expenses - or a combination of the three. That might happen. Or some other website will come along and be the new trendy thing to do and Twitter will go away. Which one will happen? Standard and Poors obviously thinks the latter scenario is quite possible.
______________________No one ever talks about how a Tweet saved someone's life or how a man trapped in a burning building summoned help using Twitter. All we hear about is sex scandals and politicians putting their foot in their mouths.
Twitter is obviously a popular site - at least the news media loves it. We hear all the time about tweets and such (usually when something awful happens as the result of it). In fact, it seems no good ever comes of Twitter. No one ever talks about how a Tweet saved someone's life or how a man trapped in a burning building summoned help using Twitter. All we hear about is sex scandals and politicians putting their foot in their mouths. Considering how dangerous Twitter can be to your reputation, I am surprised anyone uses it.
Of course, you could say that about all social media or even the Internet in general. Teenagers committing horrendous crimes (or even innocuous ones) and then posting the results on Facebook. Of course, they get caught. Bullying of vulnerable teenaged girls by mean-spirited cheerleaders. Or just the background narcissism of it all. That sort of thing. Not a lot good comes of it - but an awful lot of bad.
Television arguably killed itself with saturation advertisement. In the 1960's, companies would "sponsor" television shows and commercials could be as long as 90 seconds each (!). By the early 1970's, a half-hour show was 22 minutes in length, with eight minutes of commercials. By the 1980's, we saw some cable channels going to a 50/50 mix of programming and commercials - one minute of commercial for one minute of programming. And commercials went from 90 seconds, to 60 seconds, to 30 seconds, to 15 seconds and even to 5 second blips. And more and more of these commercials were commercials to encourage you to watch more television - something unheard of in decades past.
People fled to premium channels and viewership dropped. People started watching television on the Internet - but of course, that is being co-opted by commercials now, too.
FM Radio went through the same phase. When I was a kid, we listened to the only rock station in our market - WOUR in faraway Utica, New York. The signal barely came in, and the few ads were for rock shows, head shops, and maybe a car dealer. Within a few years, there were dozens of such stations, and each blaring tons of ads between "commercial-free" sets of four songs (the same old songs, too!). We stopped listening in droves.
Today, FM stations are owned by huge chains who desperately change formats on a weekly basis, it seems. They keep trying to connect with listeners, wondering why-oh-why we don't like their stinky product. It is easier to listen to music on your phone or ipod or computer or whatever.
Twitter faces the same problem - if it wants to make money, it has to figure out a way to advertise - in 140 characters or less! If the twits on Twitter start to feel their "feed" (feed is something you give to cattle, by the way) is clogged up with ads, they will turn away as well. It is tricky!
By its own benchmarks, Twitter seems to be falling short. From the Wikipedia Entry on Twitter:
"In July 2009, some of Twitter's revenue and user growth documents were published on TechCrunch after being illegally obtained by Hacker Croll. The documents projected 2009 revenues of US$400,000 in the third quarter and US$4 million in the fourth quarter along with 25 million users by the end of the year. The projections for the end of 2013 were US$1.54 billion in revenue, US$111 million in net earnings, and 1 billion users. No information about how Twitter planned to achieve those numbers was published. In response, Twitter co-founder Biz Stone published a blog post suggesting the possibility of legal action against the hacker." (emphasis added)As you can see, they fell far short of this, with only one quarter the users (about 250,000), one third the revenue (about $650 million) and instead of a $111 million profit, a nearly $650 loss. (Note how the Wikipedia article is long on "revenues" and short on "profits". Again, your average plebe thinks that revenues are profits and not merely gross income).
So what's the point of all this? Tech stocks and Internet stocks - as well as the bonds for the associated companies - can often be a risky bet. Internet stocks in particular are dubious, as what seems so permanent and solid one moment, can disappear overnight, when new technologies, new trends, new styles or even just new attitudes take hold.
Myself, I tend to think that if Twitter can't make money at this after five years, I am not going to loan them money to see if they can make it in another five. The only thing they have to pay back these debts is, well, more debt.