According to NYU finance professor Aswath Damodaran, Twitter Inc (NYSE:TWTR) is still highly overvalued despite its recent post-earnings pullback. Even before the company’s IPO late last year at $26, Damodaran argued the up-and-coming social media giant’s real value was closer to $18. Damodaran revisited his analysis of Twitter Inc (NYSE:TWTR) in a post yesterday in his blog Musing on Markets.

Twitter TWTR

Twitter’s first earnings report

The blog post broke down Twitter Inc (NYSE:TWTR)’s inaugural earnings report. Damodaran noted a number of positives in the report.

“1. Revenue growth in the fourth quarter was strong: Revenues more than doubled (increasing 116%) in the last quarter of 2013 (relative to the same quarter in 2012) and annual revenues in 2013 also increased by 110% over the revenues in 2012. Both numbers beat analyst expectations.

2. While the company’s reported operating losses surged in the fourth quarter, a significant portion of its expenses were associated with R&D and employee compensation: Expenses are expenses, but these two items may be less onerous for two reasons. One is that R&D represents investment for future growth, which is where investors see Twitter’s value coming from. The other, and shakier assumption, is that these expenses will become smaller, if not in dollar terms but at least in percentage terms, as revenues get larger.

3. Advertising is working and there is room to grow: The ad revenue per thousand timeline views grew to $1.49 in the fourth quarter, from a little less than a dollar per thousand views, just a quarter ago and this the driver for the revenue growth. The company also noted that its sponsored tweets are a small percentage of the overall content and that there is little danger of them overwhelming the content (and driving away users), at least for the moment.”

Twitter Revenue Growth

However, Damodaran also points out that user growth is slowing down and international revenues are lagging:

“1. User growth is slowing and Twitter is having to work harder to add users: While the number of users reached 241 million, that was a growth of only 4%  over the number last quarter, suggesting that growth is slowing. There is also some evidence that Twitter now has to work harder to acquire new users and that the growth is not effortless like it was earlier in their life. Finally, this article in the Wall Street Journal suggests a lagging in user engagement, and there is evidence of a decline in timeline views by users.

2. International revenue growth is still lagging: While Twitter’s user base internationally is substantial, the proportion of it revenues that come from these users is small. For whatever reason, Twitter’s online advertising seems to not be as productive outside the US. To the extent that the potential user base is far greater in the rest of the world, this has to be remedied if Twitter wants its revenue growth to continue.

3. The competition is not staying still: The good news about online advertising during the last few months was not restricted to Twitter. Facebook also reported that its online advertising revenues were up, as did Google. To the extent that these and other companies are eventually going to be fighting over a relatively static pie, it is clear that there will be winners and losers.”

Revised Twitter valuation from $17.84 to $20.57

Damodaran went back and revisited his earlier analysis of Twitter Inc (NYSE:TWTR) including the new numbers of the earnings report. Based on the new numbers, he values the company at $13.6 billion or $20.57 per share. This is a solid 15% increase from his earlier $17.84 valuation (which shows Twitter is actually executing relatively well), but still well less than half of Twitter Inc (NYSE:TWTR)’s current $53 plus stock price.

Twitter Pre-IPO Valuation