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Should You Buy Into Twitter’s IPO?

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So word has it that Twitter is going to IPO today. When a large, popular technology brand goes public it is always going to catch the attention. Who can forget the late 90s and early 2000s when anything a ".com" at the end of it was jumping on the stock on market.

But then there's Facebook. We remember the hype that got right? Kapitall implied it might be worth 36 trillion dollars in a video by comparing it to Microsoft and its growth. We all knew that wasn't going to happen, right?

With Facebook I made a prediction. I said that it would close at around $42-46 on the first day of trading and then slide down to $30, when the hype dies down. I wasn't that far off except that it was lower than I expected.

My prediction was based on the financials, but also on my gut. I asked myself, does Facebook seem like a $120 billion dollar company (which at the time would have been around a $42 share price I think) given the well-known problems with monetization and mobile. Is it really worth double what Ebay is, which has this nice Paypal business wrapped into it? I just didn't see it. Today, it does have that $120 billion market cap because it has answered those monetization and mobile questions emphatically.

This brings us to Twitter (TWTR). It looks like they are pricing it at $26 a share today. That would give it a valuation of $14.2 billion according to CNET or 18 billion according to MSN. (What's up with the $4 billion difference?)

My friend, Rob Berger at DoughRoller says that you shouldn't invest in Twitter. He makes reasonable points like a lack of earnings... they are losing money. However, the company is growing its revenue up 106% from last year. DoughRoller put out an interesting thought... even if Twitter had no expenses (which is an obviously absurd supposition) it would have a P/E of 32, given their projected revenue for this year. In comparison, Apple's P/E is around 13, so Twitter would still be 2.5x more expensive than Apple (again, with the assumption of Twitter having no expenses).

Here's the thing that gets me though? My gut. Is Twitter a $14 billion (or even $18 billion) company? As of today, the financial world has decided that Facebook is worth $120 billion. Is it that unreasonable to for Twitter to be 1/8th or a 1/10th that? I don't think so. If Twitter's revenue's grow another 75% (predicted some slowdown from the 106% growth), they'll have grown their top line enough to make DoughRoller's no expenses calculations seem reasonable. And while comparing a (very) hypothetical 32 P/E to Apple's 13 sounds expensive, it's a downright bargain compared to Amazon's P/E in the 1200's. While almost any company looks like a bargain in that comparison, it's important to point out that a comparison to Apple represents just one end of the spectrum. I'd argue that Twitter is closer to the Amazon end of the spectrum, because it does have the potential to grow revenues. When you make the crazy amounts of money that Apple does it gets impossibly hard to double it in a short time frame.

The thing that my gut likes most about Twitter is how the world is adapting to accommodate it. When you want a television show there's a hashtag, not just for the show, but often for specific scenes. This is tons of free advertising. I don't see other companies receiving this... and that includes Facebook. Also, almost every star I can think of is on Twitter. Imagine if you were to start a company and wanted to advertise on thousands of television shows and get the top influence-makers to actively your product. How much would you have to pay for that?

This is the kind of advantage that I think you get with Twitter that you don't get elsewhere.

In the end, I see two schools of thought. There's one taking a hardline of "Where's my profits? Without them, this is crap." and then there's a view that "Earnings will come just as they did with Ebay and Amazon who didn't have them for a long time." I'd place myself in the later view.

I'll be putting in a bid to pick up some Twitter today. I just wonder if I'll be able to get any for under $30. I predict a close of around $36.

Posted on November 7, 2013.

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11 Responses to “Should You Buy Into Twitter’s IPO?”

  1. Tommy Z says:

    At some point, people thought that eToys and Pets.com were good buys and now look at them!

    I’m not convinced that Facebook or Twitter have a proven business model that would be taken over by the next social media player. At one point in time, MySpace was the dominant player.

    Investing in a high growth, high earnings company like Apple is a better bet.

    • Lazy Man says:

      Don’t forget about Webvan ;-). The hope with these companies (eToys, Pets.com) was that they’d grow into being leaders in the field. It didn’t happen, but Amazon and ToysRUs ships plenty of toys and 1-800-PedMeds seems to be popular… so maybe it was simply poor execution and/or timing on their part.

      Friendster and Myspace were both dominant players, but I didn’t see them getting hashtags on television shows or all the stars using them. Some were on MySpace, but it was mostly music and mostly with a limited demographic (teenagers). For example, I’m 37 and I don’t know anyone who has ever had a MySpace account in their lives. Compare that to Twitter and Facebook and it isn’t even a close comparison.

      I have a good amount in Apple, but I’m not seeing them as high growth anymore. It seems like Android is eating market share. I love the high earnings from Apple though.

  2. Kosmo says:

    I’m surprised at how poorly targeted many Twitter ads are.

    65 of the 92 accounts I follow on Twitter are baseball-oriented. It should be incredibly easy for Twitter to determine my primary interest (look at the hashtags of the people I follow and use this as the basis for ads).

    Apparently, it’s not, because none of the ads I see interest me in the least.

    They key more Twitter isn’t necessarily running MORE ads, but running ads that provide more value to the advertiser, since the advertiser will pay a better price for that.

  3. contrarian says:

    Lazy – “should we buy into Twitters IPO?” – that’s a rhetorical question, right? LOL

    At a share price of around $45, Twitter has a 30 billion dollar market cap and is valued at more than 20 times expected 2015 sales! Thats heady stuff and reminiscent of 1989 and the dot com bubble.

    Intelligent investing comes from knowing what something is worth and buying it for less. Buying Twitter at this price would be considered unintelligent investing, otherwise known as gambling. Nothing wrong with gambling on Twitter, but we should call things their right name.

    – Contrarian

    • Lazy Man says:

      Well, when I wrote the article it was under the hypothetical argument that it was fairly priced at $26. So that would be closer to 11 times expected 2015 sales (if I have my math correct). Still very heady stuff.

      I go back to what Ebay and Amazon were valued at back in the dot com bubble. They had absolutely terrible sales compared with their valuations. However, they were leaders in the industry and investors at those crazy prices were rewarded, right? People joked about my buying Facebook around $20 and I was rewarded as well.

      I’m not saying it is the norm, but there are a handful of companies that have factors beyond earnings. When I think of Titans of Silicon Valley, Twitter does come to mind as one of the very few companies that I’d like to own stock in. As I mentioned in the article they’ve got stars and television advertising them for free. Compare that to Netflix which had a similar market cap when I wrote the article (~18 billion). Netflix has real sales and real earnings… and yet I don’t consider them a Titan of Silicon Valley.

      As far as “gambling” goes, having invested in Worldcom and Lucent in the past, investing in individual companies is always a “gamble.” Ask people who invested in Enron. Maybe we should call intelligent gambling?

  4. Contrarian says:

    Lazy – I can’t disagree with much of what you’ve said, and indeed, investing is (as you suggest) intelligent gambling, but there are different degrees of risk.

    When you buy something you understand, that has a history of earnings, good management, you know what it is worth, and you are buying it on sale, providing you a good margin of safety, you have mitigated your risk and are gambling intelligently. Heads I win. Tails I only lose a little.

    If on the other hand, you wade into a market that has risen NOT on a sound economy with solid earning and fundamentals, but on the FED’s relentless interventions and manipulations, buying a new business that has no PE ratio because their is no ‘E’, and on top of that you pay an inflated price on a premium valuation based on a lot of hype and wildly optimistic future projections, I’d say you have little margin of safety, and that would be best described as a dice roll. Head I win. Tails I lose …a lot!

    That doesn’t mean the safe bet always wins and the wild speculation always loses. Sometimes people do win the lottery … but buying a lottery ticket could never be considered an intelligent bet.

    – Contrarian

    • Lazy Man says:

      Contrarian, I agree with your thoughts on the market in general. I keep waiting for the other shoe to drop. And yet we’ve been waiting for awhile… and it still doesn’t drop.

      I’m not saying it isn’t going to happen because I believe it will. My question is… what do you do to prepare for it?

      For what it’s worth, I wouldn’t put “lottery winning odds” in my argument. I understand your point, but most associate that with a 1 in hundred million odds of winning. Is there a better way categorize speculation that is so dismal? Or do you feel it is really that bad?

  5. Kevin says:

    To Contrarian’s mindset of “Head I win. Tails I lose …a lot!”. I think it is the other way around. Investors look at IPO’s.. and perhaps small/new companies in general as “tails I lose, heads I win.. a lot”. Your downside is capped at 100% which certainly is a large amount (and why I will not be investing in twitter), but your upside is uncapped. If the IPO does end up the leader in it’s field, think netflix, Amazon, and more recently although to a lesser extent facebook your upside is many multiples what your original investment is.

  6. contrarian says:

    Lazy – as mentioned, there are degrees of risk – there is imprudent risk and calculated risk – and the point I was attempting to make is a speculation is not an investment. A lottery ticket is not investments. A weekend at the craps table in Vegas is not an investment. Giving $100 to your bookie on a Patriots win is not an investment. Many would suggest at $45 a share Twitter is not an investment.

    Aswath Damodaran, the valuation guru from NYU, says, “the 140-character platform will have to generate $32 billion in 2023 to be worth $45 per share – that is a 50-fold increase in revenues over the next decade to justify it’s IPO-busting current price. Twitter is a good company, with the potential to be a great one, but at this price it is not a good investment.”

    On the macro picture, I’ve said much on the topic, so I won’t repeat myself here, other than to say the “crash” is not calendar driven …it will be event driven. There will be a black swan or outlier event that will take the printing press away from the FED.

    Think of our current economic situation – QE to infinity, Zero rate policy, 17 trillion in debt, 200 trillion unfunded liabilities, 1 quadrillion in undeclared bank derivatives, BRIC’s countries moving away from the US petrodollar cartel, China importing 5000 metric tons of gold since April, etc. etc. etc. – look at all of this as the sea receding …

    People keep asking, “where’s the crash? I don’t see it. I don’t believe a crash coming.” That is like the tourists running to the beach in Thailand as the sea receded, saying “where’s the tsunami? I don’t see it. I don’t believe a tsunami is coming.” On the morning of December 26, 2004 all creatures w/a sixth sense knew something was wrong. Howler Monkeys were howling, dogs refused to go with their owners on their morning walks, elephants screamed and headed for higher ground. Humans on the other hand have a woefully undeveloped instinct for survival. They suffer cognitive dissonance, ignorance, and denial. On that same morning all the tourists headed to the beach to following the receding Indian Ocean to take pictures of the unusual event. By the time they realized what was happening it was too late.

    The economic sea is receding …

    – Contrarian

  7. […] capitalize on the opportunity. For months nothing came across my radar as a good deal. I wanted to buy into Twitter’s IPO, but the price got too high… and it has only gotten more expensive from […]

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