Web services like Facebook and Twitter love to tout their ever-expanding user bases — and its something that has the Security and Exchange Commission (SEC) a bit concerned. According to a Reuters report, SEC chairwoman Mary Jo White believes that focusing on metrics like user growth may obscure other, more important pieces of data and make it hard for investors to appropriately value the company.
"Consider a company that correctly claims it has a hundred million users, and that the rate of user growth is expected to continue to grow at double-digit rates," White said at a conference in New York. "That certainly sounds good and it would seem to bode well for the prospects of the company, but what if only a fraction of those users are paying customers? What does that mean for future financial results?"
The timing of White's comments is particularly notable as Twitter is expected to hit the NYSE tomorrow morning — it's the most-watched IPO since Facebook last year, and the company just raised the price range for its offering. White didn't call out any companies by name, but it's pretty clear from her comments that companies like Twitter — which has 230 million users but has yet to turn a profit — are in her crosshairs. "In the absence of a clear description, it can be hard not to think that these big numbers will inevitably translate into big profits for the company," White said. "But the connection may not necessarily be there."
Of course, it's not as if Twitter or other web companies like Facebook are hiding anything — data beyond user metrics is freely available when public companies report their quarterly profits, and Twitter's S-1 filing is full of details around the company's losses and potential risks. And regardless of how many users of a service are paying for it (neither Facebook nor Twitter even offer paid options), user engagement metrics have proven themselves over the years to be at least one important method of evaluating web companies.