Facebook (Nasdaq: FB)
shares soaring this year, there is considerable hype surrounding
social media stocks.
- one of the earliest and best-known social media platforms - now
plans to go public before the end of the year. That will allow
the company's founders, employees, and early investors to cash in
on a ripe market for overpriced social media stocks.
There is no doubt that Twitter is a huge force on the
Internet. After Facebook, it's the largest U.S. social network
site, with 200 million active monthly users. Not
is already attracting considerable attention from the media, as
bankers and company insiders hype the Silicon Valley success
But that isn't enough reason to justify buying this upcoming
IPO. . .
Earlier this month, Twitter filed its IPO documents with the
Securities and Exchange Commission, giving potential investors
some insight into the company's business and finances.
The 164-page S-1 registration statement is full of legalese
and background on the company. But as a value investor, the only
part that I care about is the financials. Here is a summary of
Twitter's financial performance for the last three and a half
Twitter Historical Financial Results
Loss per share
The positive news is that Twitter is growing quickly. Its
revenues grew by 200% in 2012, and were up 107% in the first half
of this year.
A big reason for that rapid growth is that the seven-year-old
company is still in its infancy. While Twitter was founded in
2006, it didn't begin generating meaningful revenue until 2011.
And a small revenue base has made it much easier for the company
show impressive revenue growth.
But the flip side is that because the company only recently
began generating revenue, the losses are huge. Even last year -
when revenue tripled - the company lost $79 million. This year
the company is trending toward an even bigger loss.
When Twitter's two largest social media peers - Facebook and
LinkedIn - went public, they were profitable companies.
They had already experienced their most rapid phase of growth and
had developed proven and profitable business models.
And that's one of my biggest concerns about Twitter. . .the
company is still ironing out its business model. That
certainly creates opportunities to innovate and grow. It also
opens up the company - and its investors - to many unknown risks
along the way.
Consider Twitter's sales per user, for example. In the
most recent quarter, the company generated revenues per user of
just $0.64. That's 60%
the revenue per user at Facebook. And it's a sign that the
company is still figuring out how to monetize its users.
The Twitter IPO is likely to happen in November, with shares
trading on the New York Stock Exchange under the symbol
. The investor roadshow starts next week, which should shed a bit
more light on the company. While we know more about Twitter
now than we did a few weeks ago, we're still missing a few key
pieces of information.
The company hasn't decided how many shares it will sell, or
the price per share. As a result, we don't know what the
value of the company will be when the Twitter IPO
Based on private market transactions in August, Twitter
estimates that it's valued at $9.7 billion. I've also seen
more recent reports saying that hedge funds were trying to buy
shares privately at a $14 billion valuation. TheStreet
reported that Twitter plans to raise $1.4 - $1.7 billion at a $15
- $16 billion valuation.
If TheStreet's report is accurate, Twitter would go public at
26-times this year's estimated revenues of $600 million.
Since the company won't earn a profit in 2013, it's impossible to
value the company on a P/E basis.
A valuation of 26-times revenue would be a premium to
Twitter's peers. Facebook and LinkedIn currently trade at
around 18-times earnings, and they offer investors the
of being profitable.
Thanks to soaring social media stock prices, investors should
expect Twitter execs and their bankers including Goldman, Morgan
Stanley, and J.P. Morgan to put a premium value on the stock.
Once we know more about the Twitter offering price and
valuation, I'll share my full analysis. In the meantime, I
offer up my words of caution. If the valuation is too high,
Twitter shares will flop just like the Facebook IPO. Buyers