- Twitter has filed its S-1 form with the SEC.
- Twitter has shown solid revenue growth with no profitability.
- Our fair value for Twitter is in $12 - $15 per share. Anything above will make TWTR stock a risky bet.
The last week saw Twitter file its S-1 form with the SEC. The filing brought the financials of the 140-character service into public view for the first time. Today we estimate the current value of Twitter based on the financials filed in its S-1. We look at two important indicators of a business: revenue growth and operating margins. We then compare the current performance of Twitter to the Pre-IPO performance of Facebook (NASDAQ:FB) to estimate the IPO valuation of Twitter.
Twitter Revenue growth
Twitter is a firm at the early stage of its life cycle. Any firm in this phase experiences significantly high growth in revenues and Twitter is no different with a 3 year average revenue growth of 170% per annum. As a comparison, Facebook’s 3 year average growth rate Pre-IPO was 87%, significantly lower than what Twitter has generated. However, a very important fact to consider is that Facebook had Pre IPO revenues which were over 10 times of what Twitter currently generates.
Operating Profit Margins
We believe operating margin is a fair reflection of business performance. While Facebook had broken-even before its IPO, we expect Twitter to break even in the Year 2014, driven by growth in its user base. Twitter currently has over 215 million users out of the total 2.4 Billion monthly internet users and 1.2 Billion monthly smartphone users. According to the company’s filing the growth in its user base will drive the growth at the company. The operating margins at Twitter have been improving which can be expected to improve further as the company will benefit from increasing scale of operation as its user base continues to rise in the coming quarters.
Considering the fact that Twitter hasn’t generated any earnings as of now, we estimate the value of the company based on its comparison to Facebook. Facebook currently has a price to sales ratio of 14.3. Considering that the market will value Twitter at twice the multiple of Facebook, we get a current valuation of Twitter at $15.92 Billion or $27.59 per share. However considering that Twitter’s absolute revenue is only 1/10th the revenue of Facebook, the estimate seems to be too optimistic. Adjusting the P/S to reflect a conservative estimate, we apply a P/S multiple of 12, considering the size of the firm’s revenues and the slowing down of the growth rate in the years to come. The conservative estimate with a P/S of 12 gives us a valuation of $6.68 Billion or $11.58 per share. The average of our estimates comes in at $11.3 billion or a price of $19.6 per share.
|Value of Twitter stock (in billion $)||15.9||6.7||11.3|
|No. of shares following Twitter IPO (in millions)||576.8||576.8||576.8|
|Value/Share (in $)||27.6||11.6||19.6|
While the market sentiment might push the IPO valuations to a far higher level, we believe anything above or around $20 will be more of a risky bet rather than a safe investment. Investors will do well to remember the chaos which followed the record breaking IPO of Facebook, which left bitter memories for many of the IPO investors. We estimate that the fair value will be $12 - $15 per share, whereas a price in excess of $20 will be on the expensive side.
We shall keep you posted on the details of the Twitter IPO.