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I was wondering if I could figure out what the actual (at close on Oct. 20, 2013) fair value for Twitter (NYSE:TWTR) may be. With no valuable free cash flow history, a comparables - Facebook (NASDAQ:FB) and LinkedIn (NYSE:LNKD) - approach may be the best choice to be followed.

After at least three years of negative annual operating cash flows, finally TWTR has reported a thin $4.3M figure for the last nine months ended September 30. This result then, when paired with $46.7M of net capital expenditures for the same period, isn't enough to reach a positive free cash flow. Without a positive free cash flow personally I find quite difficult to use any kind of DCF (Discounted Cash Flow) model to estimate a fair value.

Then a different evaluation approach was followed.

The steps were: 1) compute FB's market cap per MAU (Monthly Active Users); 2) multiply the result by TWTR's MAU; 3) correct the output taking into consideration FB and TWTR's different profitability based on their ARPUs†; 4) repeat previous steps for LNKD instead of FB with "active users" (undefined by LNKD) replaced by "unique visitors" (the most similar metric to active users).

The following table has been compiled by me with raw MAU and REV (Quarterly Revenues) data gathered from the companies' reports. UNIQV stands for: Unique Visitors. ARPU per Unique Visitor (ARPUV) has also been defined here.

FB

TWITTER

LINKEDIN

MAU(M)

REV(M)

ARPU

MAU(M)

REV(M)

ARPU

UNIQV(M)

REV(M)

ARPUV

Mar-11

680

68

75

Jun-11

739

$ 895

$1.26

85

$ 21

$0.27

82

$ 121

$ 1.54

Sep-11

800

$ 954

$1.24

101

$ 26

$0.28

88

$ 139

$ 1.64

Dec-11

845

$1,131

$1.38

117

$ 41

$0.38

84

$ 168

$ 1.95

Mar-12

901

$1,058

$1.21

138

$ 54

$0.43

103

$ 188

$ 2.02

Jun-12

955

$1,184

$1.28

151

$ 68

$0.47

114

$ 228

$ 2.10

Sep-12

1,007

$1,262

$1.29

167

$ 82

$0.52

134

$ 252

$ 2.03

Dec-12

1,056

$1,585

$1.54

185

$ 112

$0.64

126

$ 304

$ 2.34

Mar-13

1,110

$1,458

$1.35

204

$ 114

$0.59

170

$ 325

$ 2.19

Jun-13

1,155

$1,813

$1.60

218

$ 139

$0.66

189

$ 364

$ 2.03

Sep-13

232

$ 168

$0.75

Based on last available data and following aforementioned steps I could reach these results:

1) $132,043.05M/1,155M=$114.32

2) $114.32*232M=$26,522.93M

3) $0.75/$1.60 (ARPU TWTR/ARPU FB)=47%; $26,522.93M*47%=$12,404.98M

4) $29,547.77M/189M=$156.34; $156.34*232M=$36,270.28M;$0.75/$2.03 (ARPU TWTR/ARPUV LNKD)=37%; $36,270.28M*37%=$13,404.56M

As you can see, the resulting figure is a value roughly between $12.4B-13.4B.

In the offering prospectus (S-1/A filing 2013-10-15, Pg.88), the fair value of TWTR's common stock is shown at $20.62 a share as of September. Based on the maximum potential number of outstanding shares after the IPO (626.4 million shares, as calculated by me) times $20.62 a share, the outcome value is $12.9B, which someone says will be much higher.

For a double check let's look at TWTR's fair value issue under a different perspective.

We may take into consideration, for example, past evolution of quarterly revenues for both TWTR and LNKD.

In the following table you can compare quarterly revenues at different times for the two companies.

LNKD

$M

TWTR

$M

Mar-10

44.7

Dec-11

41.2

Jun-10

54.9

Mar-12

54.3

Sep-10

61.8

Jun-12

68.0

Dec-10

81.7

Sep-12

82.3

Mar-11

93.9

Dec-12

112.2

Jun-11

121.0

Mar-13

114.3

Sep-11

139.5

Jun-13

139.3

Dec-11

167.7

Sep-13

168.6

Mar-12

188.5

Dec-13

191.3*

Here is the visual representation.

(click to enlarge)

As the graph shows, the path followed by quarterly revenues of the two companies in the past seems quite similar even if referred to different time streams. Given that sales growth ultimately is the main driver of earnings growth, we may expect that peer companies, which generate similar revenues in the same field are valued the same by rational investors. At the end of March 2012, LNKD had a market value of $10.45B so we may expect (based on December quarterly revenues estimate) a fair value for TWTR to be around $10B-11B by year's end.

To reach a conclusion I think that until the end of October (when FB and LNKD 3Q earnings will be released) we may proximately consider TWTR's fair value ranging between $10B and $13.4B where the latter figure is close to the price the company valued itself.

*This is my own estimate based on statistical projections.

†ARPU: total revenue in a given geography during a given quarter, divided by the average of the number of MAUs in the geography at the beginning and end of the quarter.

Source: The Generous Valuation Twitter Gave Itself