Are Twitter Shares Worth Investing In?

So this week after 7 years of business, Twitter finally listed on the NYSE in an IPO. Shares were valued at $26 and only 70m were on offer.

Predictably the shares went as high as $50.9 inside the first 2 days and have now dropped back to $44.9 which gives them a market cap of $22.69 B*.  Screenshot below – is what happened on the first 2 days of the TWTR IPO.

twitter-shares

There was an option to sell a further 10.5m shares (called a greenshoe option) but at the time of writing I’m not sure if the underwriter have used that. Also not sure how much of a lock there was on existing shareholders who may not be able to sell for a set time period.

To put this in perspective co founders were reported to be holding 80.4m between them; Evan Williams 56.9m and Jack Dorsey 23.5m this means there was a risk of undersupply and huge market demand creating a hyped market price.

The Shares Outstanding of  544,697,000 means that less than 10% of the company was floated and it did what has been called a “secret IPO” and although it had $583m of revenue in the last year it did not have to disclose public financials; instead a confidential “S1” was filed.

This lack of transparency makes it harder to value the company but luckily after 7 years there are some other numbers out there which can be looked at. There is a lot of debate about what the real numbers are and the public numbers are thought to be over estimated.

However one very key metric is called MAU or monthly active users. The idea is that if we can get a really good idea of how many monthly active users there are then we can link some of the business model  to that and build out some more reliable indicators.

The best analysis I’ve seen on this comes from Si Dawson. Si has some unique insights in that he was one of the early twitter developers and built an application to segment twitter users based on their real activity streams.

It was called twitcleaner and I used it for a couple of years on multiple twitter accounts that I ran.

key points
  • Twitter’s S-1 filing says they have 215+ million active monthly users (or 230m), and 100m+ daily
  • Based on a sample of 1.4m accounts, the actual monthly figure is 110m (46m daily)
  • Twitter claims 40% of accounts are active but never tweet. Since this can’t be proven (they don’t publish login stats), this is an easy way to raise their figures ahead of the IPO
  • Since 2009, spam on Twitter has increased 2300% (spam is now 93% of all signups)
  • Twitter is 1/10th the size of Facebook, but has 1/15th the level of daily engagement
  • Over the 7 years of Twitter, only 2% of signups become active daily users (5% monthly)
  • Twitter is short term, Facebook more long term (eg wedding albums, holiday snaps). Daily actives is MUCH more appropriate for Twitter; ie it’s 1/19th (901m/46m) the size of Facebook
  • Facebook floated at $104b (massively overvalued, it took 15mo to return to that level) on 901m users. 1/10th-1/19th means Twitter floating at $5.4b-$9.7b (~$8-$14/share) would be similarly overvalued
  • These valuations obviously only apply IF you believe that Twitter hasn’t already peaked, will experience the same growth that Facebook has AND is able to monetize successfully

[All figures based on the analysis below. Analysis done 3 Oct – 7 Nov 2013]

A key point to note here is that Si used real actual data from almost 1.4m profiles

If you are interested in the full analysis and the methodology that Si uses  you should check out the full post it is solid work and the assumptions and caveats he makes are all well informed.

These days I work mostly in online marketing, web development, education and futures development but in a former role I was director of research & analysis for a merchant banking partnership that I helped to setup in the early 90’s.

A key question for all businesses is to be able to understand where they create value for all stakeholders and how that might feed into a valuation. For fast growing companies with new business this is a lottery but some of us have seen this type of financial market behaviour before.

As Si notes

“Frankly, I love Twitter. I’ve met so many incredible people through it.However, in the last few years Twitter has focused on monetisation at the expense of their users and their external developers (dozens of others have been affected, not just myself).

Which means ultimately, Twitter the community has suffered enormously. Prioritising money over users/product/experience is bad enough, but developers are what helped make Twitter great

This kind of attitude is damaging to the long term viability of the company, but makes perfect sense if you’re just trying to ramp up the numbers ahead of an IPO.”

Si has highlighted one of the key risk factors to me and that is the user experience. About a week ago Twitter made inline images all viewable for all desktop twitter users. We are guessing this might make it easier to drop some form of banner ads into the timeline but that ignores all of the research on “banner blindness” from other online channels.

For all sorts of reasons that is plain annoying  and will drive users away from the actual twitter application. For about the first 2 years I was on twitter I mostly used Tweetdeck, Twitterific, Hootsuite and some other twitter clients I cant remember now.

Back in 2009 I wrote about Creating Value on Twitter  and many of those observations still hold true.

This is a risk factor quoted form the actual S1 filing and Twitter would do well to really look at this one.

users believe that their experience is diminished as a result of the decisions we make with respect to the frequency, relevance and prominence of ads that we display;

Despite the share price craziness I too love twitter because of the people on there that I follow ( as @dialogCRM ) In my view a small number of twitter users have a disproportionate level of influence and that is a quality indicator not recognised in the share price.

On a good day, communication between savvy twitter users – (both in public and via private direct messaging) makes the planet a better place but forget buying those shares – in my view.

* here is a screenshot of the key numbers off NYSE because these will change when trading restarts.

twitter-nyse-8nov