Why Is Twitter Worth So Much?

Twitter

Source: http://www.flickr.com/photos/trekkyandy/

How much Twitter Inc. (NYSE:TWTR) is worth as a business really depends on whom you ask. According to Bloomberg, Brian Wieser at Pivotal Research Group thinks the company is worth as much as $19 billion; most analysts targeted a figure closer to $15 billion. The company’s initial public S-1 filing, released at the beginning of October, suggested the company valued itself at a more modest $9.7 billion, or about $13 billion including equity awards.

Twitter has exercised extreme caution during the buildup to its initial public offering. In the eyes of many potential investors, the company falls into the same nebulous category of technology and Internet startups that Facebook Inc. (NASDAQ:FB) does, and, as a result, carries some of the same dubious baggage. The platform is popular, but is it profitable? Revenues are increasing, but are they growing sustainably? Can mobile be monetized?

These questions and the general uncertainty that comes with any IPO (particularly in tech, and even more so with social media) have encouraged Twitter executives and the team of banks underwriting the offering — Goldman Sachs (NYSE:GS), JPMorgan Chase (NYSE:JPM), and Morgan Stanley (NYSE:MS) — to effectively lowball the company’s valuation. According Securities and Exchange Commission filings made this week, Twitter will price its IPO at between $17 and $20 per share, seeking to raise approximately $1.4 billion  and possibly more if underwriters exercise a right to sell additional shares, thus valuing the company at about $11 billion.

To call the $11 billion valuation modest may be an overstatement — Twitter is growing so fast and is expected to continue growing rapidly that there is a tremendous difference in looking at its valuation from either side of the timeline.

On a trailing basis, Twitter’s IPO values the company at about 26.8 times sales. Looking at expected 2014 sales, though, Twitter is valued at just 9.5 times sales. Twitter reports that it grew revenue between 2011 and 2012 by 198 percent, to $316.9 million, which is fairly consistent with analyst expectations. For the six months ended June 30, the company reported revenues of $253.6 million, up 107 percent on the year, and a net loss of $69.3 million, up 41 percent on the year. Adjusted Ebitda increased from nearly nothing to $21.4 million.

Like Facebook, Twitter’s success will largely hinge on its ability to attract and retain advertising dollars. In the second half of 2013, the company generated 87 percent of its revenue from advertising. Twitter’s major advertising products are its three “promoted” products: Promoted Tweets, Promoted Accounts, and Promoted Trends.

Twitter described its value proposition to advertisers in the context of what makes Twitter unique as a social platform. For example, Twitter offers “ad formats native to the user experience” — promoted tweets — that fall more or less seamlessly into a user’s timeline and achieve a natural feel that Facebook has spent years trying to pin down.

Twitter also offers advertisers a level of realtime advertising that Facebook also has trouble matching. The ability of Twitter to serve as the go-to platform for live information is a huge value for users, advertisers, and data partners, according to the company.

Twitter reports that it expects the worldwide online advertising market excluding mobile to increase from $91.1 billion in 2012 to $124.7 billion in 2017. It expects the mobile advertising market to increase from $10 billion to $52.2 billion, and it expects to be a leader in this category.

Twitter reported in its S-1 that “over 65% of our advertising revenue was generated from mobile devices. We expect that the proportion of active users on, and advertising revenue generated from, mobile devices, will continue to grow in the near term.”

Twitter said it had 232 million monthly active users in in September, up from 167 million a year ago. Timeline views — a measure of engagement, or use of the platform — increased about 50 percent to nearly 159 billion in September, with an average revenue per 1,000 timeline views of 97 cents, up from 80 cents in June and 65 cents in the year-ago period.

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