Comparisons to Other Networks
Facebook (FB) and LinkedIn (LNKD) provide each user their own closed private network. What makes Facebook special is the content the users share, which is generally very private in nature. LinkedIn is a private network as well but is perhaps less private than Facebook. The actual reach of each closed network on Facebook and LinkedIn is limited to just the users that each user is willing to allow access to their private network. Simply put, just based on their core focus and core services, neither Facebook nor LinkedIn are built to be the leading global content distribution platform for conversations, news and media content. They are at a major disadvantage to Twitter (TWTR) because of the inherent private nature of the content that is under their control. Without drastic and seemingly impossible business model changes, neither Facebook nor LinkedIn can really expect to compete with Twitter on its core product offering.
Twitter is a platform for any individual, group or brand to instantly share conversations, news or media content immediately through a unique global public network that has no distribution limitations - unless the user wishes to limit distribution. Most users do not invoke privacy restrictions at all or if they do it has a very limited impact on their network. Many, if not most, users allow anyone to follow them and join their network. As a result, these networks have a global potential reach. Further, there do not seem to be any real limitations that keep Twitter from replicating content structure, content delivery or content sharing strategies. Simply put, Twitter can continue to enhance its product, refining it to take the best of what Facebook, LinkedIn and others do and integrating and refining those ideas to work within Twitter's product.
Why $20 is a Reasonable Price per Share
Currently, Twitter has set $20 as the maximum IPO offering price. There are three reasons why this price may be fair.
- Twitter's Monetization Rate is 44% of the averaged Monetization Rate of Facebook and LinkedIn as shown in the table herein. Twitter has not yet shown that it can fully monetize its userbase while the comparable companies have. It therefore does not deserve to be valued at similar levels to those two companies.
- Twitter has yet to generate a profit. Losses are actually increasing. It therefore does not deserve to be valued at similar levels to those two companies.
- IPO initial pricing and valuations in general, are determined off of a variety of metrics, including possibly by using a "revenue multiple." Facebook and LinkedIn are the two comparables to Twitter and had revenue multiples of 21 and 22 as of October 25, 2013, respectively. Twitter's revenue multiple is 20 as shown in the table herein. This figure is calculated based on financial reporting in the most recent Twitter IPO filing on Form S-1 filed with the SEC on October 24, 2013. As a result of the revenue multiples between all three companies being extremely comparable, Twitter is appropriately valued at $20 per share.
Why $48 is a Reasonable Price per Share
There are four reasons.
- Twitter's Monetization Rate will improve and reach the level that Facebook and LinkedIn enjoy today once Twitter fully matures. Twitter was founded in 2007. Facebook and LinkedIn were founded in 2004 and 2002, respectively. Twitter will likely focus on developing its userbase more so than focusing on its revenues and profits for a few more years. This is a common model nowadays. As an example, only recently, as it was beginning its life as a public company, did Facebook begin to really focus on fully monetizing its userbase. The technology is there, the examples of monetization techniques are evident. Twitter has not implemented available monetization techniques in order to ensure the customer experience is unmatched and user growth can continue. Therefore, penalizing Twitter for its lower monetization rate in this scenario does not seem justifiable given that the company could likely implement improvements and boost monetization any time it chose.
- Twitter's failure to generate a profit thus far is a result of its focus on customer experience. It is not reasonable to penalize Twitter for continuing to generate losses while it focuses an all out effort to continue to secure users and retain its monopolistic position. This is a fight for dominance in their particular market. They are on well on their way but not quite there yet.
- The valuation of Twitter utilizing the revenue multiple method is reasonable. It appears very evident that this is the metric or basis that Twitter and its bankers are using to set its initial IPO price per share. The question is if this valuation method is the right method. It just does not seem relevant in a marketplace that does not place ultimate value in revenues but seems to focus more on the size and growth of a company's userbase. Some insight can be gained into Twitter, LinkedIn and Facebook when comparing their Valuation by MAU as outlined in the table herein. Simply put, this ratio represents the value the market is giving the companies for each user. When averaging this ratio for Facebook and LinkedIn and comparing the averaged ratio to Twitter, the ratio suggests Twitter's current proposed maximum IPO price of $20 is 42% underpriced. Inversely, this analysis suggests Twitter's fair price based on Valuation by MAU is approximately $48.
- In an article dated on October 28, 2013, Doug Kass, a respected hedgefund manager and popular Twitter blogger referred to Twitter as being in a "monopolistic market position." History has shown that companies in this position are valued differently than others. Twitter surely should not be valued at a "low-end" metric such as a revenue multiple given its perceived monopoly.
Its All About the Users
Valuation by MAU is a more reasonable valuation method than the revenue multiple method in this scenario. It has been widely discussed in the media that Twitter is likely over-reacting to the failures of the Facebook IPO. The reasoning is fairly straight-forward. Once the Twitter IPO is completed, all three companies will be extremely well capitalized and all three are capable of implementing similar technologies to generate revenues in a similar way from their users. It is for these reasons why the proposed IPO by Twitter is miss-priced. Twitter's stock could reach $48 if Valuation by MAU were considered by the market and the market priced Twitter efficiently. No one can know what will happen on the day of the IPO but it does seem quite reasonable to consider this alternative valuation method both before the IPO and subsequently.
(1) $47($113 + $110)/2 = 42%
(2) $20/42% = $48
Sources: All figures in table are from the most recent SEC filings for each company or represent the stock price quotes for each company as of October 25, 2013. MAU figures are referenced directly from SEC filings and may not be calculated in the same way by each company presented herein.