Comments on: Understanding Twitter’s valuation http://blogs.reuters.com/felix-salmon/2011/02/10/understanding-twitters-valuation/ A slice of lime in the soda Sun, 26 Oct 2014 19:05:02 +0000 hourly 1 http://wordpress.org/?v=4.2.5 By: unmasked http://blogs.reuters.com/felix-salmon/2011/02/10/understanding-twitters-valuation/comment-page-1/#comment-25705 Sun, 10 Apr 2011 20:00:00 +0000 http://blogs.reuters.com/felix-salmon/?p=7247#comment-25705 @TurtleBay: Many companies, including Apple, don’t pay a dividend. Because of this, people buy stock in Apple or some other non-dividend paying stock because they expect the value of the company to increase in the future, and at a high enough rate to compensate for the lack of income (ignoring the tax impact).

The price for a stock of mature companies is usually (but not always) based on recent earnings. If Apple’s profits grew at, say, 4%, its stock price would plunge, but are all stock movements rational? What happened in 2008 to cut the value of Apple in half (especially considering its record earnings during that period)?

So the question of Twitter’s valuation is not what it is earning today or even next year, but how quickly it’s valuation will grow over, say, the next 5-10 years. But no one can project that. If I were to invest in Twitter, for example, I might agree to buy it at a $1B valuation but not a $10B valuation.

What makes Twitter attractive at $1B is that in 5 years it could be valued at $20B or $0. Even if it had a 2/3 chance of failing in the next 5 years and a 1/3 chance of major growth, it would still be an easy buy. At a $10B valuation, it’s not so easy but still results in a projected return of 6%. What is the right number? I have no idea and that’s why the range in its valuation is so large. The valuation has to account for risk in some way.

The major problem facing Twitter is the ease of entry into its market. So far, with the help of corporate america, the entertainment industry and the media, Twitter gets a lot of free publicity. While a lot of people don’t know what the point of Twitter is, most people have at least heard of it while they couldn’t name a single competitor.

Yahoo’s problem is somewhat different as it hasn’t kept pace with its competitors, which include Google and Microsoft. I think we can ignore the valuations from 2000 as they didn’t include any sort of rational benchmarks. Will Facebook be able to fend off competition from Google?

Interesting times to say the least, but it is (in my opinion) in no way similar to the dot com era of 2000. Back then, changing the name of a company to include a dot com could increase its valuation by over 50%.

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By: KenG_CA http://blogs.reuters.com/felix-salmon/2011/02/10/understanding-twitters-valuation/comment-page-1/#comment-23900 Fri, 11 Feb 2011 19:38:52 +0000 http://blogs.reuters.com/felix-salmon/?p=7247#comment-23900 The valuation of almost every company is based on the amount of profit that speculators expect the company will earn. Obviously, twitter has not earned anywhere near an amount to justify a $10B valuation, but enough people (including some overrated venture capitalists) believe it will grow enough to justify that appraisal. I’m unfortunately with Curmudgeon here (I say unfortunately because my wife calls me a curmudgeon, so I hate to agree with anyone who uses that as his name), as I really don’t see how so many dot-coms, which will be dependent on a finite pool of advertisers, will generate the profits so many people expect.

During that dotcom bubble, people drove up the prices of companies with no revenue or business model, because they expected they would eventually figure out a business model that would generate revenue. A decade or so later, it is obvious that advertising is the business model to generate revenue, but the value of advertisements is inversely proportional to the industry’s capacity for advertisements, which appears to approach infinity. The more that popular websites are created, the more space there will be for ads, which will drive down the price of ads and deflate those business models and profit expectations. And twitter is even worse off than most websites, as a majority of its users rely on 140 character tweets – not an ideal vehicle for advertisements.

I think companies like twitter and facebook will prove to be a valuable tool for society, but not in the way that most people see them. They will be great vehicles for re-distribution of wealth.

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By: FifthDecade http://blogs.reuters.com/felix-salmon/2011/02/10/understanding-twitters-valuation/comment-page-1/#comment-23899 Fri, 11 Feb 2011 19:34:01 +0000 http://blogs.reuters.com/felix-salmon/?p=7247#comment-23899 I agree with Curmudgeon, TurtleBay and others. Valuing Twitter at x/5 because Facebook is valued at x is no way to make a valuation. Let’s not forget that social network users are notoriously fickle, and change ship as soon as something better comes along – and something better usually does.

As soon as Twitter (or Facebook) make too many changes to earn the money they are valued at, they will most likely lose large swathes of disgruntled users who are being used as the basis for the bubble valuations.

IF statements can be useful, but not in this context: it’s just too big an IF. The valuations can only be met IF they can work out how to monetise their setup, and IF they can keep their users and IF something better doesn’t come along.

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By: Curmudgeon http://blogs.reuters.com/felix-salmon/2011/02/10/understanding-twitters-valuation/comment-page-1/#comment-23895 Fri, 11 Feb 2011 18:04:26 +0000 http://blogs.reuters.com/felix-salmon/?p=7247#comment-23895 @TFF and others – It’s not that I’m not willing to be convinced that Facebook is worth $50 billion or more, or Twitter $10 billion. It’s that Felix mails in his justification. Saying that someone will figure out how to make money off of these concepts in the future sounds an awful lot like the worst excesses of the boom. And yes, ultimately these technologies do have to make money. I fear I expect better analysis from Felix, and am not getting it.

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By: TFF http://blogs.reuters.com/felix-salmon/2011/02/10/understanding-twitters-valuation/comment-page-1/#comment-23893 Fri, 11 Feb 2011 15:23:56 +0000 http://blogs.reuters.com/felix-salmon/?p=7247#comment-23893 Mindshare is notoriously fickle… I’ve been reading this blog for a year and a half now, longer than most of my online activities. If Felix keeps it new, keeps it interesting, I might participate for another year or three, but past experience suggests that I almost certainly won’t be here in a decade.

The fads of yesterday are rarely the fads of today, and the entrenched companies today are if anything LESS likely to reinvent themselves to become the hot companies tomorrow. Go back a dozen years and we knew that the future of the Internet belonged to some combination of AOL and Yahoo (unless Microsoft managed to break their hold). What share do they have today? (Not counting Microsoft’s Windows/Office franchises.)

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By: y2kurtus http://blogs.reuters.com/felix-salmon/2011/02/10/understanding-twitters-valuation/comment-page-1/#comment-23888 Fri, 11 Feb 2011 05:12:50 +0000 http://blogs.reuters.com/felix-salmon/?p=7247#comment-23888 To anyone willing to bid Facebook, twitter, open table, or any company up to 100 times earnings or 50 times reveune… take a look at yahoo…

It’s a 20 billion dollar company today.

It was a 40 billion dollar company in 2006

It was a 200 billion dollar company in 2000

For Twitter to be worth 10 billion dollars someone needs to explain how they will be earning 500 million in profits within 24 months… anyone care to take a stab at that?

Myspace… enought said.

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By: TurtleBay http://blogs.reuters.com/felix-salmon/2011/02/10/understanding-twitters-valuation/comment-page-1/#comment-23887 Fri, 11 Feb 2011 02:35:17 +0000 http://blogs.reuters.com/felix-salmon/?p=7247#comment-23887 @curmudgeon and @Iheke

I have to agree with curmudgeon on this one. Revenue and profit are how your measure investments. Alot of people got burnt in the dot.com bubble when they realized pageviews and mindshare can’t pay dividends to shareholders. How will Twitter monetize? I don’t see adds being as effective for them because a lot of people using third party apps that just leach off the Twitter network. Citing a valuation comparing the market share of one company trading at 50+ times revenues to another trading at 50+ is another relic of the dot.com days.

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By: Iheke http://blogs.reuters.com/felix-salmon/2011/02/10/understanding-twitters-valuation/comment-page-1/#comment-23882 Thu, 10 Feb 2011 21:21:18 +0000 http://blogs.reuters.com/felix-salmon/?p=7247#comment-23882 @Cumudgeon
I see a lot of sense in your arguments but I feel it only right to remind you that a companies revenue, profit and growth potential are only indicators of performance rather than the “key data” that enables investors to be able to make an informed decision about what value to place on a company.

Firstly, Twitter has deals in place with both Google and Bing in respect of search. Although not huge they provide a revenue baseline. Both Google and Bing have priced up the data in Twitter and sought to pay for it and guess what the next deal will be more expensive than the last.

Secondly, Twitter has plenty of advertising potential. Regardless of user numbers and percentages of internet users (for the record both are growing – rapidly), it is likely that the relevance of twitter as an advertising channel is enormous.

Thirdly, Twitter as a resource (the potential for data solutions). Twitter has rather rudimentary first generation search tools but as the technology matures this will become much more granulated. The question that arises of course is how much will media companies, researchers, marketers and other users of data pay for this targetted services.

Of these three potential uses only two have been monetised and only since last April so to see that revenue of $45m as an early year one figure you can see how exciting the future looks. As an investor you can look at the raw numbers or realise that all of these is trending upwards and the next figure you see – say next April (or even at IPO) places the stock out of reach and way beyond the $10bn figure.

@wpw and @cudmudgeon
Both of you mention Black Box but I think its entirely transparent how twitter is seeking to increase its revenues. There is no black box or raptors here.

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By: Iheke http://blogs.reuters.com/felix-salmon/2011/02/10/understanding-twitters-valuation/comment-page-1/#comment-23881 Thu, 10 Feb 2011 21:21:17 +0000 http://blogs.reuters.com/felix-salmon/?p=7247#comment-23881 @Cumudgeon
I see a lot of sense in your arguments but I feel it only right to remind you that a companies revenue, profit and growth potential are only indicators of performance rather than the “key data” that enables investors to be able to make an informed decision about what value to place on a company.

Firstly, Twitter has deals in place with both Google and Bing in respect of search. Although not huge they provide a revenue baseline. Both Google and Bing have priced up the data in Twitter and sought to pay for it and guess what the next deal will be more expensive than the last.

Secondly, Twitter has plenty of advertising potential. Regardless of user numbers and percentages of internet users (for the record both are growing – rapidly), it is likely that the relevance of twitter as an advertising channel is enormous.

Thirdly, Twitter as a resource (the potential for data solutions). Twitter has rather rudimentary first generation search tools but as the technology matures this will become much more granulated. The question that arises of course is how much will media companies, researchers, marketers and other users of data pay for this targetted services.

Of these three potential uses only two have been monetised and only since last April so to see that revenue of $45m as an early year one figure you can see how exciting the future looks. As an investor you can look at the raw numbers or realise that all of these is trending upwards and the next figure you see – say next April (or even at IPO) places the stock out of reach and way beyond the $10bn figure.

@wpw and @cudmudgeon
Both of you mention Black Box but I think its entirely transparent how twitter is seeking to increase its revenues. There is no black box or raptors here.

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By: wpw http://blogs.reuters.com/felix-salmon/2011/02/10/understanding-twitters-valuation/comment-page-1/#comment-23880 Thu, 10 Feb 2011 20:30:19 +0000 http://blogs.reuters.com/felix-salmon/?p=7247#comment-23880 I am sceptical about the value of all this, but there is no need to give my opinion much credence because I am older and not terrribly social. I find Facebook tedious and Twitter meaningless, and while I know many people who are virtually living their lives through social media now, I know more who really cant be bothered.

There is a potential danger to things like Twitter in that they increase society’s already excessive inclinations toward the immediate and the superficial. When I first started to use Twitter (before growing bored and irritated with it) it reminded me of the type of people featured in the book “The Smartest Guys in the Room” about Enron. Part of the story was about how much emphasis was put on deals and not on any follow through after the deals. The dealmakers made a great story and they continued to build the story, but nobody bothered to build the company. All that was important was what was immediate and upfront. The mundane work which was the real value of the company was not valued at all.

I saw the same thing at another institution. A bunch of brilliant people built a massive social network built upon a house of cards of immediate and persistent interaction. They achieved what they thought was their goal but when they got there they did not know what to do. It was not that they did not have the ability to do it, it was that all that mattered to them was the promise, not the delivery. This is nothing new in human history, just the means of making the promises changed.

Things like Twitter might be of value to clever, quick and social types like Felix Salmon, but let’s not think it is going to reshape all human interaction.

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