How to value Twitter?
Not sure why the usual cited yardstick for valuing Twitter is a multiple of Twitters' YTD revenue ($14 billion market cap is nearly 30x revenue)... as opposed to EV/Revenue or EV/EBITDA. Is it because there are no similar comps, or precedent transactions that offer a valuation range?
Revenue multiples are standard in the tech industry for companies with negative earnings.
I would guess that Goldman is comping Twitter to other major tech IPOs. Workday, LinkedIn, Facebook, etc. Since they're using revenue multiples, maybe sprinkle in some smaller high-growth SaaS companies as well.
Btw, IPO multiples are done off of next year's forecasted revenue/earnings. Think Twitter is projected at ~$1B, so that's a 14x multiple, not 30x.
Ask Morgan Stanley to do a valuation and divide that number by 2.
LOL, although, FB's current share price is $12 above its IPO price.
LOL, although, FB's current share price is $12 above its IPO price.
How to value Twitter: Nobody knows, unless you have a crystal ball and go out 10+ years
How to price Twitter for IPO: Sales multiples of other social networking companies, other industry-specific multiples [i.e. number of users], demand for the IPO shares. I'd imagine simply demand for the shares exhibited so far is the most relevant metric
I recently posted a pretty lengthy qualitative reply to a different user regarding Twitter as a business here: http://www.wallstreetoasis.com/forums/bird-is-the-word
Additionally, valuation god Aswath Damodaran recently posted his thoughts on Twitter's valuation and share price here: http://www.wallstreetoasis.com/blog/the-twitter-ipo-thoughts-on-the-ipo…
In response to this, as stated above, revenue multiples are common when actual earnings aren't present yet (such is the case of Twitter). That said, even revenue multiples aren't necessarily that useful for Twitter since it's still a pretty fast growing company with new upcoming revenue streams. Still, most common would probably be to look at revenue per monthly average user (MAU) and compare that to similar ad-based internet companies such as Facebook. Facebook is definitely the more mature of the two businesses, so you might compare the two Rev/MAU multiples to get a range of what the overall valuation could be.
Twitter Announces IPO: The Valuation (Originally Posted: 10/08/2013)
A little more than a week ago, I posted my first take on Twitter and argued that even in the absence of financial information from the company (since the prospectus had not been filed yet), you could price the company. Based on prior transactions in the company (VC infusions and acquisitions) and the multiples of revenues/users for other companies in the space (the social media medley, as I called it), I argued that Twitter would be priced at about $12 billion by the bankers.
The state of the company
The IPO set up
Valuing Twitter
The value of Twitter lies in what it can do with its 215 million users (the estimate in the S-1) rather than what it has done in the past. This is the section where I am sure that we will have to agree to disagree but the following sections summarize my assumptions.
A. Cash Flows/Earnings
1. Revenue Growth: The first leg of value creation for Twitter is for it to be able to grow its revenues out, from the $448 million in the most recent twelve months. To get some perspective on what the potential for revenue growth is in this sector, I started by looking at the latest assessments of the size of the online advertising market. While the estimates vary across sources, this one (from eMarketer.com) looks like it is close to reality (with the percent market shares and dollar revenues in millions):
B. Risk/Cost of capital
Is Twitter a risky company? Of course, but to estimate the rate of return that I would demand to cover its risk, I looked at three components:
- Business mix: While the bulk of Twitter's revenues come from and will continue to come from advertising, Twitter does have a data trove of past tweets that may be mined for commercial or research reasons. In the first six months of 2013, Twitter generated 12.6% of its revenues from its data services and this proportion will probably decline in the future. Using a business mix of 90% advertising and 10% from data services yields a beta of 1.40 for the company. (Beta for Twitter = (0.90) (Beta for advertising) + 0.10 (Beta for data services) = 0.9(1.44)+0.1(1.05) = 1.40)
- Geographic mix: While Twitter generated very little of its revenues from outside the US in 2011 and 2012, about 25% of its revenues came from the the rest of the world in 2013. Using an equity risk premium for the US of 5.75% and a GDP-weighted average equity risk premium of 7.23% for the rest of the world, with the current weights of 75% and 25% for each, yields a value of 6.15% for Twitter. Given that Twitter now has far more followers outside the US than in the US (S-1, Page 67), the proportions and equity risk premium may shift in the future.
- Financing mix: Twitter has capital leases of $71 million and the capitalized value of operating leases is $127 million. Collectively, debt accounts for 1.69% of capital and Twitter's cost of capital, given these assumptions, is 11.22%.
C. Loose EndsGetting from the value of the operating assets to the value of equity per share in Twitter requires us to get over a series of speed bumps:
- NOL & Taxes: The company's operating losses have resulted in a net operating loss of $468 million (S-1, page 217) which I use to shelter the company's income, when it does start making money, from taxes. As a result, I do not expect the company to pay taxes until year 5. Once it starts paying taxes, I assume that it will face an effective tax rate of 30%, which over time will move to the marginal tax rate of 35.50% (S-1, page 211) after year 10.
- Cash & IPO Proceeds: I add up the cash and short term investments of the company (see page 173) to arrive at a cash balance, which is added to the value of the operating assets. Since I have assumed that the IPO proceeds will be $1 billion and that they will be retained by the firm, I add that value to the cash.
- Capital & Operating leases: As mentioned in the risk section, I did convert the operating lease commitments of the company (page 214) to debt and added it to the capital leases to arrive at a total value of debt of $299 million.
- Survival Risk: While young companies with operating losses are susceptible to failure, I will assume that Twitter's deep pocketed equity investors will bring in capital, if the company gets into trouble, rather than leave value on the table. I have assumed that there is a 100% chance of the company surviving.
- Option overhang: The company has 44.16 million options outstanding, with a strike price of $1.82 (S1- page 207). Halving the remaining life on these options, to reflect the empirical reality that employee options get exercised about halfway through their lives, gives me a life of 3.47 years and in conjunction with an estimated standard deviation from the company of 53.6% (see page 207) yields a value of $805 million for these options (net of tax benefits in the future).
- Classes of shares: The best news I see in this filing is that there is no mention of two classes of shares (with different voting rights) or special corporate status (which I did see in the Facebook filing). While that may change in future revisions, that does make my job easier in terms of estimating value of equity per share.
The net effect of these adjustments is to get a value of equity of $9.97 billion for the equity in common stock and a value per share of $17.36. The picture below captures the various assumptions in the valuation and you can download the spreadsheet with the valuation.Decision Time
Just saw you on CNBC, talking about this same topic!!
Thanks for the post.
Twitter? Why not this: http://www.forbes.com/sites/steveschaefer/2013/10/04/the-biggest-winner…
Great post by the way.
Thanks for the valuation! With Twitter's current trend, you are right on track
Twitter Valuation jumps to $7.7 billion (Originally Posted: 03/07/2011)
The latest tech valuation makes things even more absurd. http://mashable.com/2011/03/07/twitter-valuation-7-7-billion/
"The latest auction of Twitter shares on Sharespost valued the company at $7.7 billion, which is almost twice as high than Twitter’s valuation after a round of funding in January this year.
According to Sharespost, a secondary market that lets investors trade with otherwise illiquid assets, investors have agreed to buy 35,000 shares of Twitter’s Series B preferred stock at $34.50 per share. Multiplying that figure with the 223.7 million fully diluted Twitter shares listed by Sharespost one gets a staggering $7.718 billion.
Facebook has experienced a similar growth on secondary markets in the last two years: after being valued a mere $9.5 billion in November 2009, a round of funding in January this year valued it at $50 billion, with the latest trades with the company’s shares pushing the number even higher, to $65 billion.
What do you think? Are these valuations based in real expectations of these companies’ future performance, or have we entered another bubble?"
Facebook's valuation is much more defensible that Twitter, as they have a clear monetization strategy and actual cash flow to point to. Twitter has some half-baked ideas, but no real cash flow or idea of how to generate such.
Agreed. I don't see the furor over Facebook as much as this, there's logic to Facebook, whether you believe it or not. This seems quite hazy to me.
I feel like twitter will eventually lose its luster. It receives a bunch of traffic, and has many users, but its surrounded on the idea of living vicariously through others, or caring so much about what they do. I honestly just can't see this lasting that long. If it goes public, there'll be a bunch of people that think there is so much potential, but honestly, what kind of potential does it REALLY have. 50 cent can swing the price of stocks, but when he starts pushing his new gatorade (i guess it would be vitamin water) 24/7, thus maximizing its advertising potential, the users will get pissed and over the whole concept. I'll let it grow, and short it. Hello groupon and twitter, welcome to the year 2000.
Groupon sounds like a very sexual verb, so does twitter (except more violent). Facebook on the other hand is an adjective. Adjectives are the clear winner.
Clearly Twitter must have hired Charlie Sheen to justify that bump in their valuation.
You guys clearly have no idea what Twitter does. $7.7 billion for Twitter is far and away more realistic than $50 billion for Facebook (or $150 billion if you believe the rumors of a Saudi takeover of Facebook to forestall a revolution).
uh...could you expand on that Edmundo Braverman, (if that's your real name)...
Happy,
If you're referring to the Saudi rumor, here it is. It's completely ludicrous, but entertaining nonetheless:
http://www.p2pnet.net/story/49691
If you're referring to Twitter vs. Facebook, that's probably an explanation deserving of its own post.
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