Facebashing: Twitter's Non-IPO Vs. Facebook's IPO

| About: Facebook (FB)

"Reality is what we take to be true. What we take to be true is what we believe. What we believe is based upon our perceptions. What we perceive depends upon what we look for. What we look for depends upon what we think. What we think depends upon what we perceive. What we perceive determines what we believe. What we believe determines what we take to be true. What we take to be true is our reality." Gary Zukav

Facebook bashing has entered the realm of the utterly absurd. This morning I came across an article comparing Facebook (NASDAQ:FB) to Twitter, and arguing that a future Twitter IPO would blow the Facebook IPO away. Then in the afternoon I read an article from Wall Street Cheat Sheet that argued for a Facebook comparable Apple (NASDAQ:AAPL)/Google (NASDAQ:GOOG) valuation of six to seven dollars; a pretty amusing argument when you consider that Facebook is sitting on almost five dollars a share in cash on hand. And let's not forget the ridiculous Reuters survey which seemed to be almost commissioned to have something negative to report. Yep, tearing something down is a lot more fun than building it up.

That is no surprise, but you'd think with something this big that at least some people would have a nice grasp of what is going on and get the message out. Sadly, that has not happened yet, so I have taken it upon myself to weigh in with an article or two that offers what I think is a more accurate assessment of the "Facebook Fiasco."

For this note I will focus on the misconception that Facebook's IPO was somehow a failure, and more specifically on a TheStreet.com article which compared how Facebook has been managed to Twitter. An article which, by the way, I was surprised to discover was written by SA regular contributor and fellow Netflix (NASDAQ:NFLX) bear Rocco Pendola.

In his article, Rocco, who admittedly is bullish on Facebook, makes an argument that somehow implies Twitter has executed better than Facebook. To be specific, Rocco writes, "everything Mark Zuckerberg and Facebook have done well, Dick Costolo and Twitter have done better." Really? With all due respect to Rocco, that is a ridiculous statement and very typical of the type of stuff Facebook is getting hammered with on a daily basis. And let's be clear I am saying this despite the fact that there is no web property that has caught my eye more than Twitter over the past couple of years. It is in fact the only stock I have ever personally purchased on a secondary market, and also one that I professionally lobbied for acquiring a position in at a valuation closer to $2.5 billion. Suffice to say, I know a thing or two about the company.

I can also tell you that my interest in Twitter carried over into other microblogging sites like Sina's (NASDAQ:SINA) Weibo (a much better bargain valuation wise) before they became mainstream market stories. So why was Twitter so interesting to me? Simple: It was and still is a web property acquisition candidate the likes of which you rarely come across in markets. To me a Twitter Google marriage was a no-brainer from day one. (The same argument goes for Baidu (NASDAQ:BIDU) and Weibo.) The problem with this view is that Twitter knows this and so do Facebook, Microsoft (NASDAQ:MSFT), Yahoo (NASDAQ:YHOO), and Apple. That is what has always appealed to me about this stock, the near certainty of a nice fat premium from an acquirer was always too tempting to pass up.

But let's be clear, knowing you are an attractive piece of web real estate isn't a measure of execution. Twitter is by no means executing better than Facebook. In fact, odds are Costolo and co. will never come close to accomplishing 10% of what Zuckerberg has accomplished. This is because Twitter's path to comparable monetization is 1000x harder than Facebook's. Twitter for me is like having Bloomberg Anywhere except I don't pay $3000+ a month for it and the array of information is much more diversified.

It is an incredible feed of data, but completely lacking in valuable display real estate or a clear subscription revenue model capable of justifying the current valuation. This is why Twitter recorded revenue of less than $150 million last year versus $3.8 billion for Facebook. So, for all the criticism about mobile, at least Facebook actually has valuable display real estate to fall back on.

See, I am of the belief that mobile is not going to be an advertising rainmaker for anyone of the big internet companies. I think the real money in mobile will go to the network operators, the transaction/payment processors, and the premium branded hardware sellers. Mobile from an ad standpoint is just not valuable display real estate, and odds are it may never be. It is similar to what has transpired in television with sporting events as on demand killed the captive live TV audience. If you control the valuable piece of a shrinking pie, you will retain pricing power. The NFL, NBA, and the likes have figured that out. The same philosophy will apply to online advertising. Basically, if Facebook owns the most valuable real estate you are checking into via a non-mobile device, they will continue to prosper even as mobile web usage rates continue to rise.

Yep, mobile monetization is a challenge for all the major content players on the web, so I am not going to lose a lot of sleep over it right now. This is also why when I hear Twitter's Costolo touting how well they are doing on mobile now that this has become a hot topic, I can do nothing but smirk. Twitter doesn't have a real display business, and thus no cash cow to milk while they experiment with ways to milk the mobile web. Their strength is also on the go news which makes them more suited for mobile as far as engagement, but that doesn't mean mobile monetization will be any easier for them than it is for Google or Facebook. Honestly, if you cornered Dick Costolo I am sure you could get him to admit that he wished he had Facebook's 'mobile problem' because as things stand he still hasn't figured out how to generate significant revenue, let alone profits, out of the entire Twitter platform.

This monetization problem has been what has held back the Twitter and Weibo IPOs, not some sort of management steady as she goes philosophy. That was the case before Facebook, which contrary to popular belief, timed its IPO to perfection. Yes, in the land of going public, raising a $7 billion war chest and providing insiders a fat $10 billion single day cash out at a $100 billion valuation is the definition of perfection.

Understand that Facebook not only raised enough cash to do as they see fit for the next decade, but they also guaranteed themselves that they hit the top of a cycle. This is pretty good news if your future business model is hiring talent and acquiring smaller start- ups. When the perception in the capital markets is that there is no more easy money in your sector, valuations start to fall and jobs disappear. If you are Facebook, you couldn't ask for a better environment to execute your strategy.

This is why I have a hard time understanding how anyone could argue that Costolo has done a better job of positioning Twitter for its seminal market moment. Twitter didn't have what it took to IPO before Facebook rang the bell, and after Facebook they have almost no chance of coming to market without disappointing a bunch of their current investors. Their last major round was north of $8 billion. Run the numbers and you will realize that this is over 50x trailing revenue or 3x where Facebook is at today. Oh, and at this valuation the last VC guys who put in the capital Twitter is burning through while it tries to figure out its model get to break even. So explain to me how such an IPO will blow the Facebook IPO away when the last major round Facebook raised was at $50 billion, and those investors got a partial exit at $100 billion in under two years?

As things stand, the Twitter story is all about having a good poker face as a private sale is the only realistic exit that will satisfy all Twitter investors at this point in time. If they try to go the IPO route (which I still think is not an option because of de minimus relative revenue), they will have to do a managed IPO in which they float a tiny slice and play the artificial demand game and try to facilitate their exit.

This is also assuming Twitter's revenue growth - which has been a major challenge - really comes through and hits this $1 billion by 2014 mark that has been loosely tossed around. And let's not even bother with a profitability conversation right now let alone make comparisons to Facebook's pre-IPO EBITDA margins.

See, if you consider how intricately Twitter has woven itself into our daily lives, its revenue at this point in time is very disappointing. You can't say the same thing for Facebook, and that my friends, is what you call execution.

Disclosure: I am long FB via call options.

About this article:

Tagged: , , , Internet Information Providers, , SA Submit
Problem with this article? Please tell us. Disagree with this article? .