Seeking Alpha
Long/short equity, deep value, growth, newsletter provider
Profile| Send Message|
( followers)  

Last month Carl Icahn announced his Apple Inc (NASDAQ:AAPL) purchase on Twitter, sending its market cap up tens of billions of dollars worth in a day. He did not make this announcement on Facebook (NASDAQ:FB). When the Nasdaq (NASDAQ:NDAQ) outage hit last month it was 35 minutes LATER that CNBC or any of the other news outlets reported the news. ONE MINUTE after it had happened traders where tweeting it! Twitter is THE medium for news and information. If anything happens in the world where do you go and look for news? Do you go on Facebook and its clunky search feature? Of course not. You go to Twitter, type in the phrase you are looking for and VOILA, you can see what the entire world is saying about it. Twitter is a very powerful NEWS media and it is still in its infancy.

Yesterday Twitter (NYSE:TWTR) released their S-1 filing, the final step before coming to market. This step occurs 21 days prior to an IPO. Twitter has stated its intention to have its IPO before Thanksgiving, and this time frame appears on track.

There have been a lot of comparisons between Facebook and Twitter, mostly focusing on the disaster of an IPO FB had, and the huge run-up, and then collapse, in shares of GSV Capital Corp (NASDAQ:GSVC) and Firsthand Technology Value Fund (NASDAQ:SVVC), both owners of FB. Because of this false view we believe that both GSVC and SVVC are being undervalued this time around into the Twitter IPO.

Before we dig into these two stocks we are going to look at a possible valuation for Twitter so that we can assign potential value to each of the above stocks. Twitter is perfectly suited to mobile. As other social media companies have struggled to adapt to mobile, the format of twitter, its 140 characters, is made for mobile. In this article we are going to make some assumptions from the information that is available and use it to justify what we feel is a possible price for Twitter after its IPO.

When Facebook went public its annual revenue was $3.7 billion and the company was eight years old. As it moved to its IPO date FB continued to increase its IPO price until it went to market with a $104 billion market cap. In contrast, Twitter is seven years old and revenue was $317m last year. The rush for the IPO has to do with the Jobs Act and allowing companies to IPO while their annual revenues is under $1 billion. The mad rush may be an indication of accelerating revenues, a very good sign for investors.

Rev per user
Facebook $2.17
Linkedln (NYSE:LNKD) $1.93
Twitter $1.73

Facebook in its last earnings report before the IPO broke down their revenue on a per user basis. They had 845 million active users and generated $943m for a $1.12 per user average. That number has increased over the last year to $2.17 as of the latest quarter. Twitter average daily users are 100 million per S1. Using the 100 million user number and the $120m advertising revenue from the June quarter, we come out with a $1.20 revenue per user number for that quarter. This was a 20% quarter over quarter from the March quarter and implies a $1.44 rate for the September quarter end and a $1.73 revenue per user number for the December quarter. This would make sense for the IPO timing now as Twitter pushes above the billion dollar threshold under this growth trajectory. Revenue growth has started to accelerate for Twitter, as it has for Facebook, over the last couple of quarters.

Sales Market Cap Multiple
Facebook $3.7b $104b 28
Twitter $700m $19.6b 28

The above box is based on our estimated price to sales multiple of FB of 28, applied to the estimated annual sales of Twitter using our $1.73 revenue per user number for the current quarter. This gives us a market cap estimate of $19.6 billion.

News sources have stated that Twitter plans to sell 50m shares for a price of $28 per share for a market cap of $10-15 billion. Based on the FB IPO criteria we have seen, shares of Twitter are 25-50% less than what we would see when assigning the "FB Multiple". Also, another huge positive is that Twitter has learned from FB IPO fiasco and is only planning to sell 50 million shares. This number was not in the S-1 filing so it could change. There will be tremendous demand for such a low offering. If we look at another high-flying social media stock such as LNKD, we see it is trading at a multiple of 18 times sales. Like most of these high PE stocks, it is being rewarded for its growth rate. Twitter is showing a 20% quarter over quarter revenue per user growth rate and could surpass the rate for FB in the next two quarters. Given that Twitter only starting generating revenue two years ago and is already approaching $1 billion in sales, indicates a tremendous growth rate. Wall Street pays a premium for strong growth rates and that should add to the market cap value for Twitter.

Now that we have looked at possible valuations for Twitter based on estimates, let us now look at ways to play the IPO. It is a given that Twitter will be the hottest IPO of the year. The small size of the share offering will insure the stock has a big open. Unlike FB, who took every last piece of stock appreciation into the IPO, Twitter is approaching it having learned that lesson.


(Click to enlarge)

GSVC currently owns 1,835,600 shares of Twitter common stock and an additional 65,000 shares of preferred shares. The cost of these shares is $32,991,000 and represents 15.14% of GSVC. GSVC is carrying these shares at a value of $19.80 per share. The table below outlines the potential profit for GSVC on differing levels of Twitter pricing. At $100 per share for Twitter on the IPO GSVC would see its asset value grow by $152m. With a $300m market cap that would give a 50% increase.

IPO Price GSVC Value Millions NAV Gain
$30 $57.0 $19.4
$40 $76.0 $38.4
$50 $95.0 $57.4
$75 $142.5 $104.9
$100 $190.0 $152.4

There is also one other way to invest in Twitter prior to the IPO, Firsthand Technology Fund . Like GSVC, SVVC is a closed end fund that invests in pre-IPO stocks. They current own 812,000 shares of Twitter along with 194,000 preferred shares. This represents 10.4% of the fund. They also own 600,000 shares of FB that represent 11.2% of the fund. Another big positive for SVVC, and in turn investors in the stock, is they also have 50% of their assets in CASH. SVVC carries its 1,060,000 shares of Twitter at a cost of $22.87 per share. Using the same valuation table we used for GSVC we get the following potential asset value increase of SVVC on a successful Twitter IPO.

IPO Price SVVC Value Millions NAV Gain
$30 $31.8 $8.8
$40 $42.4 $19.4
$50 $53.0 $30.0
$75 $79.5 $56.5
$100 $106.0 $83.0

SVVC is currently trading UNDER its net asset value with no premium being assigned yet for its Twitter ownership. The NAV for SVVC is currently $25.80, with 50% of that in cash. A Twitter IPO in the $50+ range could add $56m in value to SVVC.

The two charts below are charts of GSVC and SVVC prior to the FB IPO. SVVC moved from $23 per share to $46 per share in the month before the FB IPO. GSVC moved from $13 to $20. Similar price appreciation could be seen again based on asset value increases as well as potential momentum.


(Click to enlarge)


(Click to enlarge)

Using FB as a road-map for the possible appreciation in shares of GSVC and SVVC into the Twitter IPO, we obtain price targets of $20 for GSVC and $40 for SVVC. Investors should note that each of these closed end funds owned LESS shares of FB than they do Twitter and that the FB IPO did not leave much room for appreciation for upside for IPO buyers. Twitter is leaving "meat on the bone" for IPO buyers and that is a huge benefit for owners of both stocks. Since August shares of GSVC and SVVC have gained nicely, but those gains were before news of the Twitter IPO. The driver of those moves in the stocks was the very small ownership stakes in FB each has. GSVC on 300,000 shares and SVVC on 600,000 shares of FB. The $20 gain in shares of FB gave GSVC a $700k increase in assets and SVVC a $1.2m increase in asset value. The Twitter IPO will PRICE $10 or more per share higher than the carrying value each has for their respective Twitter positions. That equates to a $19.4m asset increase for GSVC and $8.8m for SVVC at a $30 IPO price. Those asset gains alone dwarf the recent gains they saw on shares of FB. Investors should also note that both companies have many other pre-IPO stocks that we have not included in our valuations. Investors should also note that the market is not rational right now with regards to market caps and valuations. IPO's are hot. The hottest IPO is coming in the next month. GSVC and SVVC are the only way to get in at the IPO price!

Source: Twitter IPO Could See Big Win For GSV Capital And Firsthand Technology Value Fund