As anticipation surrounding Twitter Inc (TWTR)’s initial public offering heats up, valuation guru and New York University finance professor Aswath Damodaran has posted his own valuation of the company on his blog.
What is Twitter worth?
He argued a little over a week ago that the micro-blogging site was worth approximately $12 billion. He used previous transactions, including venture capital infusions and acquisitions, to value Twitter, along with the multiples of revenues or users of other companies in the same space. After Twitter Inc (TWTR) released its S1 IPO application publicly, he used the company’s actual financial information to come up with his valuation. He says overall, the picture isn’t surprising, but he has made some small adjustments to his valuation.
Its revenues have been growing rapidly, climbing more than 100 percent in the first half of this year compared to the first half of last year. However, in spite of that jump, the revenues for the 12 months ending in June of this year were just $448 million, which was well below the $583 million he used in his first post.
Twitter isn’t profitable yet
He notes that throughout the company’s entire life, it has seen operating losses, although research and development expenses make up a sizable chunk of its operating expenses. Twitter’s EBITDA trend is positive, but he doesn’t see much significance in the number which is based on “fiction that employee expenses can be added back because they are non-cash.”
Damodaran posted Twitter’s balance sheet as well, saying that it illustrates “how completely useless accounting balance sheets are at young firms,” especially technology companies like Twitter. He said the only number on the sheet which matters is the cash balance because its intangible asset item doesn’t measure any of its true intangibles goodwill plays “its usual (and useless) role as plug variable.”
One thing he does say for certain about Twitter Inc (TWTR), however, is that it looks to be much earlier in its growth phase than Facebook Inc (NASDAQ:FB) was when it filed for its IPO.
Setting up Twitter’s IPO
He notes that simply giving a company a valuation ahead of its IPO is difficult for a number of reasons. For one thing, the offering itself has a feedback effect because the cash from the offering adds to the company’s value as long as its founders do not cash out. Second, the share count number is shifting as other types of securities are converted and more shares are handed out as employee compensation.
Twitter is expected to raise approximately $1 billion through its offering with a share price of about $20. That $1 billion will likely be added to its cash balance on the date of the offering.
What can Twitter do with 215 million users?
Damodaran notes that Twitter Inc (TWTR)’s real value is in what it can do with the 215 million users it currently has. He said the first step in the company’s value creation is to grow its revenues from the $448 million it recorded over the last 12 months. Like most analysts, he notes that advertising revenue is going to be a big part of Twitter’s revenues, especially as it focuses on growth.
He also looked at the micro-blogging site’s target operating margin, using other companies like Facebook Inc (NASDAQ:FB) as a comparison. Although he notes that some of those comparisons are difficult to make because the business models are so different, he expects to see a margin of around 25 percent, which is a bit lower than Facebook’s current margin.
Damodaran’s three levels of Twitter
Based on his entire calculation, the valuation guru said he would be very positive on Twitter at $10 per share (a $6 billion market capitalization), indifferent to it at $17.50 per share (a $10 billion market cap), and negative on it at $35 per share (a $20 billion market cap). His entire valuation is worth reading if you’re interested in all the numbers.