The Known, Unknown, and Unknowable of Twitter's $10 Billion Valuation

The Atlantic Wire

In all this Twitter $10 billion valuation talk a lot of theoretical numbers and estimates get thrown out there as fact. Using such numbers The Wall Street Journal's Dennis K Berman asserted that "the facts" proved the platform's rumored worth, even though he later couched that by saying "Twitter isn't worth $10 billion if you benchmark it to its current financials." The Next Web's Alex Wilhelm has done a nice line-by-line takedown of problems he sees in Berman's math. But that doesn't much clarify the money Twitter makes and how that might be reflected in an IPO Twitter will supposedly move ahead with in "a year or so," as the people familiar with the company told Berman. Taking a look at all the knowns, it's hard to justify Twitter's huge $10 billion valuation. 

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Users: How Big?

Knowns: Twitter says it has 200 million monthly active users as of December 2012, double what it claimed to have in the one year earlier in the fall of 2011. 

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Unknowns: Berman extrapolates that 200 million monthly active user number to "about 500 million" by 2014 estimating the same 40 percent growth Twitter saw last year will sustain itself over the next couple of years. 

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Unknowable: It's not so unbelievable that Twitter would continue its pace of growth worldwide. But, in America—a more lucrative market than overseas—the growth has already started to slow, as Forbes's Jeff Bercovici pointed out. In 2012, Twitter had 15 percent of Americans using its service, compared to the 13 percent the year before

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Revenue: How Much? 

Knowns: At the end of last year, TechCrunch's Alexia Tsotsis said "we are confident Twitter brought in $350 million in revenue in 2012." With 200 million monthly active users, that puts the dollars per users, or ARPU, at around $1.75. She, however, has "sources" estimating $600-$650 million in revenues for 2013. 

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Unknowns: Berman uses his "about 500 million" ussers number and multiplies it with an estimated $7 per user number by 2014 to get $3.5 billion in revenue. The $7 number comes from another made-up estimate that Twitter makes $4 per user right now, which is much higher than the $1.75 we calculated above.

Unknowable: To jump from $350 million to $3.5 billion of revenue, Twitter needs to post either huge user growth or huge revenue per user numbers—or both. The $4 per person figure is already twice their current real numbers. Assuming they can get to $7 is basically assuming Twitter is a huge business.

Twitter has had a huge ad push, as companies are spending more on social advertising that suggests it will make more per user in the next couple of years. But, then again, it will likely see more of its new growth outside of the United States, where, as Facebook has learned, there are smaller revenues per user.

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Others, including Tsotsis' sources, estimate that Twitter will make $1 billion by 2014, a more conservative and believable estimate than Berman's $3.5 billion. 

Value: What's It Worth? 

Knowns: Twitter's stock doesn't trade publicly, so we don't have a transparent market value. In July 2011, Twitter did a $800 million round of fundraising at a valuation of $8 billion (that is, investors received 10 percent of the company in exchange for their $800 million.) And on secondary markets, there have been reports that insiders have been selling their stock more recently at $11 billion valuations. But while Twitter remains a private business, calculating its value is a tricky business (or parlor game if you're not one of the people buying or selling shares). But here we go: We do know Twitter's 200 million users and its $350 million in revenue in 2012. Berman also has sources saying that Twitter has a (very high!) 40 percent margins, meaning it makes a lot of profits off its revenues. Facebook's margin is 7 percent, for example, and LinkedIn's 10 percent, according to Quartz's Zach Seward.

Unknowns: To get his $12.5 billion figure, Berman compared Twitter to Google, another company that makes most of its money selling targeted text ads. Since he too thinks 40 percent margins sound high, he used Google's "gushing" 21 percent margins to get his $3.5 billion figure, and Google's price/earnings ratio, which right now stands at 24.72 to get to a potential $12.5 billion market value for Twitter.

Unknowable: You can say that it's going to be a lot and get a big market cap. But really, all of the number-crunching is a way of putting false precision on the same question that's bedeviled Twitter since it started: how much money can tweets make?

 

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