Twitter (NYSE:TWTR) had its big coming out party on Thursday, Nov. 7, 2013, creating an estimated $34.7 billion worth of wealth before its first day of trading on the New York Stock Exchange ended. If you're reading this, chances are you are not among the newly minted multimillionaires and billionaires who founded or invested heavily in the social media company prior to its initial public offering. As interesting as that story might be, what's more compelling is that Twitter could make a lot of money for a lot of smart individual investors.
Why? Because unlike Facebook (NASDAQ:FB) or LinkedIn (NYSE:LNKD), it's the underdog social network with respect to active monthly users and profits. Yet its market capitalization of almost $19.91 billion (as of Nov. 12, 2013) and it's strategic positioning make it the only social media network poised to dominate mobile and social TV over the next two years. The question isn't whether or not you should buy Twitter, but at what price.
What's interesting about Twitter is that it isn't the story of snot-nosed Ivy League kids getting rich like the founders of Facebook. It's about rebellious engineers who wanted to make an impact getting rich. In the book Hatching Twitter, author Nick Bilton highlights several instances where founders Evan Williams, Jack Dorsey, and Biz Stone were not above backstabbing and petty infighting. It's high-tech drama, corporate greed, and startup glory rolled into one delicious story, akin to a deep-fried Turducken.
Unlike Facebook's board, the top level decision makers at Twitter are seasoned media executives and savvy media investors with a track record of generating big returns for themselves and their portfolios. Facebook's board of directors is packed with really smart people (Harvard graduates or associated with Harvard in some way) with track records of developing products. The resumes of Facebook's executives include previous roles at Genentech, Mozilla, Netscape, and fundraising for Bill Clinton.
By those facts alone it would seem as if Facebook would be the better buy -- it boasts more users, higher engagement, larger profits, and has a woman on its board. By contrast, Twitter is dwarfed by Facebook's reach and seemingly complete domination of social media. But Twitter has the potential to fundamentally disrupt how the media industry evolves over the next few years, and that means big money and potentially larger cultural significance.
Facebook and Twitter -- Side By Side
Let's take a quick look at Facebook and Twitter's revenue, management structure, and total amount of capital raised to get a sense of the differences:
Number of users
Number of users: 234 million
Revenue on IPO announcement
Amount of capital raised prior to IPO
Peter Chernin, Rizvi Traverse, JPMorgan (NYSE:JPM)
Post IPO Value
Facebook is, without a doubt, the largest social network ever created; it boasted over 800 million users prior to its initial public offering. As of September 2013, it had 874 million mobile users and over 1.19 billion monthly active users. Facebook still remains the only place where you can stay up to date with loved ones and see the latest trending cat meme all in one. Twitter is dwarfed by the sheer mass of Facebook, and only has 234 million users. Following the Nov. 7 spectacular opening, investors have valued Twitter's users at $138 a piece vs. $127 for Facebook at the same time post-IPO, according to TechCrunch.
What are investors seeing in Twitter that they didn't see in Facebook? For one, Twitter has a lot more to gain than Facebook had to lose at the same time post-IPO. They also see Twitter as the anti-Facebook, both in terms of product and the way it handled itself pre- and post-IPO.
These People Got Rich on Thursday, and They're About to Get Richer
Twitter is only a fifth of the size of Facebook with approximately 200 million users worldwide, yet it closed its very first day of trading at over $45 per share. Why is that? Because unlike Google+ and Facebook, Twitter makes a great deal of its data publicly available. This has allowed many companies to build businesses off of the data Twitter generates, and in turn Twitter purchased them to help build a company focused on analytics and advertising. It's that perfect combination of buzz words and acquisitions that has many salivating over shares of Twitter, turning executives and shareholders of the micro-blogging platform into billionaires overnight.
Investors like JPMorgan and private equity firm Rizvi Traverse made a combined $6.16 billion by the time trading ended on Thursday. Founders Jack Dorsey and Evan Williams both made $3.69 billion, with Williams making as much as $2.617 billion before trading ended. Current CEO Richard Costolo made an estimated $353 million. That's not chump change, and this is just the beginning. Things get a bit more interesting the more we dive into Twitter's numbers, and begin to see who owns what. Rizvi Traverse is the largest holder of share in Twitter, and the private equity firms owns more shares of Twitter than founders Dorsey and Williams combined. That isn't such a bad thing when you consider who Rizvi Traverse raises money from (more on that below).
What is more interesting are the vesting schedules for people like Peter Chernin (former News Corporation (NASDAQ:NWSA) executive) and Christopher Fry, Twitter's senior VP of engineering. Both joined Twitter in 2010 and contribute significant value in terms of media connections and engineering prowess, respectively. Together, their expertise is what will help turn Twitter into a media giant. They're also the only two people on Twitter's board who won't see their shares until 2019. As part of their contracts both Chernin and Fry must satisfy performance and service conditions to receive their options. If Twitter's stock price were to double, Christopher Fry could see his compensation swell to over $64.4 million, making him one of the most handsomely compensated engineers in Silicon Valley. But doubling in size isn't why Twitter went public. Their eyes are on a much larger prize, one that includes reaching profitability by 2015 and long-term growth beyond that.
Chernin has much to gain from his advisory role in Twitter. His share is on the low end of the spectrum; he would have made $9.2 million for his firm The Chernin Group on Thursday. Prior to creating The Chernin Group, a company that invests and advises media startups like Pandora, Tumblr and Flipboard, Chernin was the COO of News Corporation. For 13 years he helped steer Fox Broadcasting Company and Twentieth Century Fox toward their respective No.1 positions. The fact that so many connections exist between News Corporation and Twitter is no coincidence. If Twitter becomes a true media powerhouse over the next two years it's because of Chernin and other News Corporation execs working hard behind the scenes to help traditional media make big gains in social. The other News Corporation alum on the Twitter board is Adam Bain. As acting president of global revenue, he increased Twitter's revenue by over 14 times from 2010 through September 2013 to $412 million. Bain made an estimated $82.1 million on paper through the IPO.
But the biggest player and connector in all of this is Rizvi Traverse, a private equity firm that controls over 17% of Twitter's shares and made an estimated $3.19 billion on Thursday. Rizvi Traverse has a long track record of producing big numbers for media companies like Hollywood talent agency ICM, and helped Hugh Hefner regain control of the Playboy brand in 2011. Though the firm is famously secretive about who its investors are, it's been rumored that Rizvi Traverse has raised money from high profile investors like Richard Branson and Chris Sacca. Sacca, an investor in Photobucket, helped oversee its sale to Myspace under News Corporation in 2007. News Corporation, despite its somewhat unethical journalistic practices, knows how to make money. In 2012 they made lots of it too, $10.33 billion worth.
Could Twitter be the next strategic partner for the media behemoth? At the very least, Twitter could make a lot of money supplying audience data and generating advertising revenue as a second screen during all of News Corporation's prime-time content. It certainly has the technology to do so.
It's the Technology Stupid
When Twitter initially announced its intent to go public, it valued its shares at $17 to $23 each. However, one key analyst at SunTrust Robinson Humphrey was quick to dismiss Twitter's own valuation as too low. His research suggested Twitter would open closer to $50. He was off by $3 when shares of TWTR opened at $47. His name is Robert Peck and he covers technology and social media markets for SunTrust Robinson Humphrey.
Peck's reasoning was multi-fold, one he believed that Twitter's own undervaluation meant that they understood Facebook's missteps leading up to and following their IPO. He also saw the technology underlying Twitter and its methods for generating revenue as more effective and longer lasting than Facebook's. After all, Twitter is really serious about analytics and data. So much so that it spent $10 million to bring Christopher Fry on board in 2010. Why? Because Fry has the right combination of business savvy, leadership and has the ability to produce as much code as ten engineers. For Twitter that combination of skills was worth 700,000 shares and a $145,000 per year salary. If those stocks had vested on Thursday, Fry would have made over $32 million.
According to Peck, Twitter has made real headway in mobile advertising thanks to its appetite for data analysis. Which is something Facebook and LinkedIn have struggled to monetize effectively until recently. As a text-based, real-time service it's already more mobile friendly than Facebook, has the ability to generate and distribute more mobile content, and functions as the perfect second screen for social TV. Twitter's acquisition of Vine for $30 million, BlueFin for $90 million, and MoPub and Trendrr for $350 million each give weight to his argument.
Vine positions the microblogging platform to better monetize mobile content. MoPub, a mobile advertising platform, will allow Twitter to make strong headway toward generating huge revenue through associated smartphone apps and browsers. Everything about the company appears to be geared toward generating and monetizing mobile content as seamlessly as possible. As the mobile space grows, Twitter is the one platform uniquely positioned to generate short messages, videos, and produce enough analytics for advertisers to understand how they can use it for their own ends.
Twitter's acquisition of social TV analytics companies Trendrr and BlueFin highlight its intentions to become a player in big media. Trendrr delivers real time analytics on TV shows based on the conversations occurring around associated keywords. Both Blue Fin and Trendrr are what make social TV work for advertisers and helped hit shows like "Breaking Bad" stay alive and grow viewership by 442% year over year, according to Entertainment Weekly.
More importantly, tools like Nielsen Twitter TV Ratings and TV ad targeting allow advertisers to create sponsored tweets and Vine videos to appear in the Twitter feed commenters. According to Business Insider Intelligence, "Twitter will also soon be partnering with ESPN and other TV networks to post video clips on the service, which will help both broadcasters and Twitter skim some ad revenues from video views on the platform." That's something Facebook's ad platform doesn't do and is the reason why Vine has the potential to generate real revenue as an advertising channel in ways that Instagram, currently, cannot match. Twitter's bet on social TV could pay off big. It definitely has the connections to make social TV the next big thing in social media.
Having investors like Richard Branson and Peter Chernin will help Twitter secure those deals, or at least figure out a way to monetize social TV. In combination with other acquisitions like We Are Hunted, which became Twitter Music, the company is poised take off. All it needs is capital, which it raised in large amounts through its Nov. 7 IPO.
Should You Buy?
In one word, yes -- but it's hard to justify a purchase at over $40 per share. If the stock dips below $30 per share, it could be a great tech bargain. There are rumblings that the technology industry is in a bubble, and the stock market overall is poised for a crash. Business Insider's Henry Blodget predicts that the market is set to lose 40%-50% of its value. No one can predict the future, but judging by the information provided by trusted analysts like Peck, the track record of Twitter's private equity investors and huge profits and additional influence advisors like Peter Chernin could rake in if the company doubles in size make the outlook on Twitter very positive. Flush with capital, although still far away from becoming profitable, Twitter can now make the strategic purchases it needs to become the perfect companion to traditional big media, fuel the growth of new publishing platforms, and generate real advertising revenue for itself.