Twitter - Valuation Per User In Line With Facebook

| About: Twitter, Inc. (TWTR)

Twitter (NYSE:TWTR) made its public debut on Thursday, November 7. Shares of the global platform to express yourself ended their first day with gains of 72.7%. Shares witnessed a correction on Friday, but are still trading far above the offer price at $41.65 per share.

As the current valuation per user is in line with Facebook, it remains hard to say whether the valuation is too high or too low. While Twitter is not profitable yet, growth is quite impressive, as the company is still doubling its revenues on an annual basis.

The Public Offering

Twitter is well known from its simple text forms which are limited to 140 characters. The global platform allows people to create and distribute content real time, creating an unfiltered voice around the world. With the service, all people can contribute to "live" events which can be extremely useful in some situations.

At the moment, Twitter has more than 230 million active users, of which some 100 million are active every day. These users, including head of states, athletes and celebrities create some 500 million Tweets every day.

The timely creation and distribution of Tweets have shown great help in information distribution in natural disasters and political revolutions. Tweets provide timely information, especially when other communication means or mediums fail.

Twitter sold 70.0 million shares for $26 apiece, thereby raising $1.82 billion in gross proceeds. All shares were being sold by the company with no shares being offered by selling shareholders.

Initially, bankers and the firm set an initial price range of $17-$20 per share. Shares were eventually sold above the high end of the initial public price range.

Some 13% of the total shares were offered in the public offering. At Friday's closing price of $41.65 per share, the firm is valued at $22.7 billion.

The major banks that brought the company public were Goldman Sachs (NYSE:GS), JPMorgan (NYSE:JPM), Morgan Stanley (NYSE:MS), Bank of America/Merrill Lynch (NYSE:BAC), Deutsche Bank, Allen & Company and CODE Advisors.


Crucial to Twitter's value are platform partners and advertisers, besides the user base of course. Many of the traditional media outlets have integrated their service with Twitter, and often use the service for news distribution. At the same time advertisers use "Promoted Products" to promote their brands, goods and services.

While users are not generating revenues directly as the service is for free, all the content creation by normal users and Platform Partners are creating huge amounts of content. This results in higher advertising revenues and boosts the value of the network.

Mobile products are driving the business, as the service is limited to just a 140 characters, similar to original SMS. Over the past quarter, 76% of monthly users used a mobile device to access Twitter, while 70% of advertising revenues were being generated from mobile.

For the year of 2012, Twitter generated annual revenues of $316.9 million, up 198.1% on the year before. Net losses narrowed from $128.3 million to $79.4 million.

For the first nine months of 2013, Twitter generated revenues of $422.2 million, up 106.3% on the year before. Net losses nearly doubled from $70.7 million to $133.9 million. Losses were being driven by some costs which by far outpaced revenue growth. Notably research & development costs and sales and marketing costs were on the rise. Note that non-GAAP losses were much lower, partially the result of the fact that stock-based compensation expenses nearly quadrupled to $79.2 million.

The company operates with $155.7 million in cash and equivalents and no debt. Factoring in the gross proceeds of $1.82 billion from the offering, Twitter will operate with a net cash position of around $1.8 billion, after deducting IPO related expenses.

With the equity in the business being valued around $22.7 billion, operating assets are valued around $20.9 billion. This values assets at roughly 66 times last year's annual revenues.

Investment Thesis

As noted above, the offering of Twitter has been a huge success. The company priced the offering at $26 per share, some 40.5% above the midpoint of the original preliminary offering range. Shares advanced to $41.65 in the days following the offering, trading with gains of 125.1% from the midpoint of the preliminary offering range.

Clearly the market has been upbeat about the offering of Twitter, driven partially by the strong general stock market and the public offering market this year. The fact that Facebook (NASDAQ:FB) has recovered to levels above their public offering level, after trading down over 50%, has certainly helped as well.

Furthermore the public offering has been well structured as relatively few shares were brought to the market, with 13% of the outstanding share base being offered. The fact that no insiders sold as well has been a strong signal, creating still very much aligned interests. The limited float makes a short position a bit dangerous as well.

Actually Twitter has a few things going for it, in terms of comparison with Facebook. Growth in terms of users and revenues is much higher, while the mobile revenue percentages are very impressive. Note that the monthly average user base rose by 39% over the past quarter, on an annual basis, while total revenues more than doubled.

That being said, the monthly average user base is just a fifth of that of Facebook, while users generate less advertising revenues due to relatively more inactive accounts and less engagement. Revenues per user came in at $0.73 for the quarter, compared to $1.72 for Facebook.

As such Twitter is a bit later in the game compared to Facebook and direct comparisons are not relevant yet, as the company is a few year's behind Facebook's growth stage. For now the valuations are roughly aligned. With nearly 250 million users, the stock is valued around $23 billion, while Facebook's 1.2 billion user base results in a nearly $120 billion valuation. As such investors value both the average user on both platforms at nearly $100. Twitter reports higher growth at the moment, and has more room to grow. Facebook is generating much higher revenues per user, and is reporting decent profits.

While the valuation seems rich, especially on traditional metrics, shorts could still get hurt badly. Just ask investors who shorted Facebook in more recent times, Google (NASDAQ:GOOG) and LinkedIn (NYSE:LNKD). They are still licking their wounds after short selling around the public offering.

I remain on the sidelines.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.