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Discount Hope

18 October 2013 By Robert Cyran, Richard Beales

Twitter’s immature market debut leaves plenty of room for investors’ animal spirits. Early disorganization and a late focus on the top line make the microblogging service seem younger than Facebook when it went public. The social network was profitable, while Twitter is in the red – but its revenue is growing faster than at Mark Zuckerberg’s outfit.

Twitter’s most recent internal valuation is more than $12 billion, based on a $20.62 share price used internally in early September and the 603 million diluted share count including in-the-money options at the end of last month. Updated third-quarter figures in the latest draft prospect show revenue more than doubled from the same period last year to $169 million. Twitter lost $65 million in the quarter, its biggest quarterly shortfall since at least the start of 2011. That probably won’t scare off prospective investors, who mostly care about potential in this kind of technology initial public offering.

Facebook, an obvious benchmark, now trades on a multiple of about 20 times its last 12 months of sales. At that multiple, Twitter’s market capitalization would be in the $10 billion ballpark, but its revenue is growing much faster than Facebook’s roughly 50 percent year-on-year increase in the second quarter. That makes it easy to imagine a $15 billion valuation for Twitter.

It may be a stretch to suggest investors will immediately value a Twitter user as highly as a Facebook regular. But suppose they did: each of Facebook’s current 1.2 billion monthly users is worth more than $100. Apply that to 232 million twitterers, and a figure well above $20 billion drops out.

Twitter will want to avoid the share price plunge that followed Facebook’s IPO, so its bankers may price it conservatively. But it’s in a better position because revenue growth isn’t slowing, while Facebook’s expansion declined in the six months before it hit the market from over 100 percent a year to around 45 percent. The social network also hadn’t yet proved it could make money on mobile devices, but Twitter already gets 70 percent of its revenue that way.

The company’s timing may help, too. Advertising should increase solidly during the coming holiday season, and with heavy investment in research and development Twitter can point to several ad streams, such as video and television-related tweets, that are not yet fully tapped. With investors sure to bake hope into the IPO, Twitter’s last internal valuation is set to look old hat.


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