Is Twitter overvalued?
My fav social media analyst Jeremiah Owyang crunched the numbers to suggest that each active user on Twitter is worth $ 74. I’d like to take it even further to look at whether Twitter is overvalued at $250M.
The case for ‘Yes’
With 6M reported members, and 3.4M active members, Twitter is a phenomenon. But how do you monetize this base?
Premium: Under a freemium model, conventional wisdom says that 3 – 5% of users will upgrade to a paid service. So, let’s take the high end and assume a $50/ year paid service (doubt they’d get more than that).
Under this illustration, 300K (6M * 5%) users would upgrade. This would generate $ 15M in revenues for Twitter. Now, let’s look at this rumoured valuation. These numbers suggest a value of 16.67X forward revenue (250/ 15) or $ 833.33 for every paid user (250M/ 300K). This is very high. Only mobile operators who lock you into multi-year contracts can come to close to these per user values.
Advertising: Given the amount of time we spend tweeting and following each day, there is an advertising play here. But I see two issues: rates and control.
Rates: Don Dodge suggests that the average CPM rate for social networks is $0.36. To generate that same $15M in revenue from ads, Twitter would need to serve up 42B pages!
Control: How do they do that when most of Twitter’s activity does not take place on their web site but on 3rd party clients?
Not sure this valuation makes sense based on the advertising potential either.
The case for ‘no’
There are some arguments to suggest that $250M would not be overvaluing Twitter:
The 6M reported user figure is pretty old now. The actual figure today may be much higher as this graph (courtesy of Techcrunch) suggests:
A growing user stream is worth way more than a stagnant one. The per user value numbers may be much lower when we factor in current and projected growth.
As I said at the outset, Twitter is a phenomenon. Somebody will want to own this and will pay handsomely for it. Even before raising additional $, Twitter is in a league where only the biggest companies could or would buy it (Google, Cisco, Facebook, Microsoft, etc). These companies can pay big ticket prices. Just look at the $ 1.65B Google paid for Youtube back in 2005.
If Twitter raises another $20M, that will bring its funding to date to $ 40M. Let’s assume the VCs will collectively own 75%. Under these numbers, for the VCs to get 10x cash on cash back (i.e. to get $400M back), the company would need to exit for $533M ($400 / 75%). That’s not such a big number given Twitter’s market presence.
So is Twitter overvalued? That question will never be answered till it exits. Till then, its just conversation. I do know that if I was on the VC side, I’d have a tough time justifying a $250M pre-money. But on the other hand, I’d also be very eager to get a piece of the company. Investments like that don’t come around every day.
What do you think? Is Twitter overvalued?