Twitter’s (NYSE:TWTR) current market value of close to $24 billion appears questionable, and this becomes apparent when we compare the company with Facebook (NASDAQ:FB) and LinkedIn (NYSE:LNKD) on several key operating metrics. Although Twitter significantly lags LinkedIn in terms of margins and average revenue per user, their market valuations are comparable. In comparison, Twitter’s valuation looks paltry in front of Facebook’s $120 billion market value, which primarily stems from a substantial difference between margins, active user base and revenue per user. Our price estimate for Twitter stands at $26, implying a discount of about 40% to the market price. Unlike the market, we are valuing Twitter on the basis of diluted share count of close to 666 million. In this analysis, we’ll see how the company stacks up against the other Internet giants that went public in the last two years.
Twitter’s User Base Is Comparable To LinkedIn’s, But Way Below Facebook’s
One of the reasons why Twitter’s valuation differs significantly from that of Facebook is the difference in their monthly active user bases. We estimate that Facebook’s average monthly active users will amount to 1.17 billion in 2013, compared to 226 million for Twitter. For LinkedIn, the corresponding metric is average monthly unique visitors, which we expect to grow to close to 200 million in 2013. Its current user base is over 250 million.
Over the next eight to nine years, we expect both Twitter and LinkedIn to increase their monthly active user counts to close to 600 million compared to more than 2 billion for Facebook. Unlike Twitter’s limited features, Facebook offers much more flexibility and variety in content sharing, including photos, games, apps, comments, status updates, groups, community pages and more. Twitter has a 140-character limit for its tweets and is public in nature, thus limiting the amount and type of content that users can share. Similar to Twitter, LinkedIn also has a specific value proposition of connecting job candidates with recruiters and marketers with their potential customers.
Monthly active user base forecasts (million) (Source: Trefis estimates)
Twitter’s Average Revenue Per User Is Significantly Below That For Facebook And LinkedIn
We expect Twitter’s average annual revenue per user to amount to $2.8 in 2013, which stands significantly below our expectation for Facebook and LinkedIn. While the figure for Facebook is expected to hit $6.5, the same for LinkedIn will reach $8.3. It is evident that Twitter has a long way to go in terms of monetizing its platform. The company started rolling out promoted tweets for the mobile platform in early 2012, and is growing its sales and marketing support teams to sell more of its ad inventory. It also plans to extend its self-serve advertising platform outside the U.S. As a result, we expect the company’s revenue per user to grow three-fold over the next seven to eight years. Currently, LinkedIn seems to be doing the best job on revenue per user basis primarily because its business is diversified across advertising, premium subscriptions and recruitment solutions. Given that Twitter relies mainly on advertising, its revenue per user will remain below that of LinkedIn in the foreseeable future.
Annual revenue per active user for 2013 ($) (Source: Trefis estimates)
Twitter’s Margins Are Very Low, But Expected To Trend Towards Those Of LinkedIn And Facebook
For 2013, we expect Twitter’s adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) margin to be close to 7% as compared to 24% for LinkedIn and a massive 54% for Facebook. While we expect the figure to increase substantially over time, the current disparity is very high and clearly shows that the company is lagging its rivals. While cost of revenue is very low, research and development expenses stand at roughly 34% of revenues, with sales and marketing costs inching upwards towards 30% mark. In the long run, these expenses are likely to come down as a percentage of revenue as Twitter gains operating leverage from advertising revenue growth.
Adjusted EBITDA margin (%) (Source: Trefis estimates)
Our price estimate for Twitter stands at $26, implying a discount of about 40% to the market price.
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