If you were holding Twitter stock yesterday, congrats. You can now afford an extra bedroom in your house in Pacific Heights. Or maybe a baby. But not both. Anyway, Twitter’s IPO pop has the world losing its collective marbles, so let’s take a look at how the market is currently valuing Twitter in comparison to a few analogs.
The question is simple: Does Twitter’s valuation at its current levels make sense?
Twitter initially stated that it would sell its stock as low as $17 per share. Demand for the 70 million offered shares was so strong, Twitter finally priced itself at $26 per share. Shares started the day at $45. There is some quibbling that Twitter left money on the table, but the company went public at a massive delta to what it deemed an acceptable range, and managed to have a stunningly successful first day. If you think the company is crying into its hashtag soup, you’re wrong.
For this post, we’ll use Twitter’s initial trading level of $45.10, and market capitalization — at that price point, using fully diluted shares — of $31.8 billion. Facebook, by comparison, priced its IPO at $38 per share, but started trading at $42.05, valuing the firm at $115 billion, again using a diluted share count.
- At its first-trade valuation, Twitter is worth $137 per monthly active user (It has 232 million). That figure will decline if Twitter’s valuation decreases, or its monthly active user count increases. The former could happen, the latter most certainly will.
- At the time of its IPO, Facebook had 901 million monthly active users. Using its first-trade valuation, Facebook was worth around $127 per monthly active user.
So Twitter is only slightly more richly valued at the time on a first-trade basis than Facebook was when it finally made it to the public markets. Does that make Twitter investors batty? Perhaps not, but it’s worth noting that Facebook stock suffered from large declines from a discounted starting point in the months following its debut.
The lesson would therefore appear to be that investors are pricing Twitter as if they expect it to grow more quickly than Facebook did in its first year as a public company. Missteps could be very costly for the social firm.
For reference, to calculate its diluted earnings per share, Facebook uses a combined Class A and Class B share count of 3.23 billion. (Google Finance et al. use its basic share count of 2.43 billion, if you were curious.) Therefore, at its current market price of $47.87, the company is worth $154 billion. In its most recent quarterly report, Facebook reported 1.19 billion monthly active users. So, Facebook is currently valued on a diluted-share valuation basis, at $129.41 per monthly active user.
We have to ask ourselves again, is the market overvaluing Twitter, Facebook, or both?
I want to hazard a guess towards both. Facebook took a hammering when it became readily apparent that its mobile advertising efforts were puny, and its revenue growth could slow as it matured. Its stock fell as low as $18 per share at rock bottom. It then turned its mobile its business around, and the market responded by bidding up its shares back on a per-monthly-active-user basis to where it IPO’d.
Facebook only came back in the market when it proved itself to be perhaps the most adept monetizer of mobile yet, eliminating what was then the key concern surrounding its business.
But through these comparisons, it’s important to keep one thing in mind: Facebook’s valuation includes implicitly its ability to generate profit off of its users. It was also a more mature company when it went public, so the comparison is somewhat apple-orange, but it does imply that the market expects Twitter to be worth more on a per-user basis when it is profitable – if it’s willing to value Twitter more per-user when it loses money, it is certainly logical to presume that when Twitter does turn a profit, that figure will rise. Profitable companies are worth more than companies that lose money.
Facebook’s five-year expected PEG ratio is nearly two, which worries me. That Twitter is valued in some ways more richly than Facebook now, with a far less mature business model, makes me fret.
Investors are currently betting that Twitter’s revenue growth will continue at impressive rates. As I reported recently:
According to its newly refiled S-1 document, Twitter has lost $133.8 million to date in 2013. That compares negatively with its equivalent loss of $70.7 million in 2012. Both loss figures include the results of the first 9 months of the calendar year. [...]
The other side to all this is that Twitter’s revenues are rapidly expanding. The company posted third-quarter revenue of $168.6 million, which compares favorably to its collected $253.6 million in the first half 2013 revenue.
The gist of the above is that Twitter is in a high-growth, high-cost moment. The stakes of that are simple, now that it is public: Keep the revenue growth in high gear, and start to trim the losses. If Twitter continues to grow both its losses and its revenue, its ability to enjoy high margins in the future will be called into doubt.
And you can’t say that investors don’t expect Twitter to not enjoy the margins that Facebook commands.
This all comes down to a simple point: Investors are betting that Twitter will perform at nearly herculean levels in its first few quarters. Can it?
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