Is Twitter Really Worth $10 Billion?

/// Is Twitter Really Worth $10 Billion?

February 27, 2013  |  Blog

I spent the last week trying to write a column that proved Twitter wasn’t worth $10 billion. Then the facts intervened.

Stubbornly, they arranged themselves into a most unexpected conclusion, one that seems almost blasphemy to type: Twitter has the potential to match some of the money-gushing properties of the Internet’s greatest money gusher, Google Inc.

If you watched the Oscars Sunday night, you saw Twitter’s raw influence on display as jaunty red carpeters, advertisers and actors gabbed in Twitter’s sometimes-obtuse language of hashtags and handles. It was as if the world had folded in on itself—all-powerful television reduced to being a lowly portal to social media.

That cultural ascendancy isn’t lost on Twitter and its investors, who are said to be plotting what would be the premier public offering of 2013. In recent weeks the seven-year-old company completed private transactions that pegged its value at $9 billion. Others have put the value above $10 billion.

This is remarkable because Twitter has been in the money-making game for only three years, primarily selling “sponsored tweets” to advertisers whose come-ons pop up in the message streams of the service’s 200 million-plus active users.

It’s working. Advertising-data-firm eMarketer Inc. estimates 2014 revenue at $808 million, but people in the venture-capital community are already whispering that Twitter will break $1 billion by then. In fact, eMarketer will soon revise its figures upward though it won’t say by how much.

Twitter isn’t worth $10 billion if you benchmark it to its curr ent financials. But that hardly matters now. The prime question is just how big Twitter can get—and how profitable.

Walk through the numbers, as I did with the aid of a new research firm called Triton Research, and it’s hard not to see the ghosts of Google past.

Today, with a relatively immature set of products, Twitter is collecting an estimated $4 for each of its 200 million-plus monthly active users. Ad budgets are moving increasingly to social outlets—a secular shift that should easily push this number higher. Being conservative, let’s peg that number at $7 per user by 2016, below the rate analysts expect Facebook’s revenue to grow.

Pew Research Center figures suggest it will be difficult for Twitter to reach Facebook’s billion-member plateau. Still, in the last nine months of 2012, Twitter users increased by more than 40%. Maintain a pace of more than 33% growth for three years and that member number expands to about 500 million. That will require lots of growth outside the U.S., where some one in five Twitter users are expected to reside by 2014.

This is where Twitter will have to do most of its work. Foreign competitors are making headway, and Twitter is shut out of China. But watch the Oscars and you’ll see that Twitter doesn’t have to do much advertising yet—others are proselytizing on their own dime.

The math in the example above suggests $3.5 billion a year of revenue, about where Google was in 2004. And the magic hasn’t kicked in yet.

That magic is the value of free labor. The company doesn’t have to pay a cent for the 400 million messages sent each day. As with Facebook, the users willingly, voraciously, do the work gratis.

And as with Facebook and Google, advertisers are increasingly doing their own work, too, using automated tools for targeting and buying advertisements. Last week, Twitter said it would improve ways for advertisers to access its systems.

Companies love touting themselves as “platforms,” but in Twitter’s case it happens to be true. The company must spend to maintain its plumbing and constantly improve its interface, but once that’s done, it stands back and collects its middleman money.

That means getting to massive scale at relatively minimal cost. Twitter won’t divulge figures, but people in the venture community, including some Twitter backers, say its margins are as high as 30% to 40%.

For simplicity’s sake, let’s reduce Twitter’s net margins to Google’s, which are a gusher-like 21%. Value all those earnings at Google’s 17-times-trading multiple, and, voilà, Twitter has a value of $12.5 billion. And you needn’t tweak conditions much to get a higher number.

What could go wrong? The major worry is international growth. Advertisers may also have a natural limit on their Twitter spending. Unlike many users of Google or even Pinterest, Twitter users aren’t browsing with a clear intent to purchase. And then there is Twitter fatigue, in which users may feel deluged by information. The company will have to invest to prevent this.

Late-stage venture investing “is the hardest time to think about a company,” adds Rick Heitzmann of FirstMark Capital, an investor in Pinterest, which just earned its own $2.5 billion valuation with zero revenue. “You’re in between. It’s not small enough to be completely speculative and not broad enough to know growth rates or earnings margins.”

The mispriced Facebook IPO was a reminder of Silicon Valley’s worst tendencies—the way its culture can force a collective, unquestioning belief about what things are worth. Silicon Valley will try again with Twitter. And, despite its own tendencies, this time it will probably be right.

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