Is Twitter ($TWTR) Overvalued?

Bling Bling, Tweet Tweet

I’ve gotten this question a lot lately. So I thought I’d write some general thoughts.

Twitter Overview

When looking at an investment it’s a good idea to look at the qualitative factors to define a good business….so is Twitter a good business?

Qualitative: Twitter is the ultimate communication portal for relevant information. From a qualitative standpoint it has a lot to like in network effects….It’s difficult to replicate a user base of 200M, which gives it a significant competitive moat. It becomes more powerful with each user/brand that joins. I don’t believe Twitter has really put an emphasis on revenue and has only scratched the surface. Significant opportunities remain such as one-click shopping, targeted advertising, and increased interaction with live television events. Twitter has become THE platform for relevant content and will continue to have a significant impact around the world.

Quantitative: However, from a quantitative standpoint it’s hard to wrap my head around an unprofitable 26x revenue company when Facebook and LinkedIn are trading at 17x and 19x respectively. Anyone investing must identify how much you are willing to pay up for growth and future expectations of management.

Big Idea: I’m never a fan of any business measuring on “eyeballs and pageviews,” but the power of Twitter is underestimated. I choose to follow brands I care about and I find out about new brands and relevant content through Twitter.

Think how big the advertising business is in TV, radio, etc. Those businesses are predicated around “brand awareness.” Rarely will you sit on the couch, see an advertisement, and immediately buy that product. With Twitter? There could be a point in time where I see one-click purchases through Twitter.

As a brand, I can isolate; I want to target 25-28 year old males in the Austin, TX area that follow ESPN to advertise a new kind of athletic shoe. The power of that targeted advertising is immensely powerful to a brand vs. hoping repetitive commercials will increase brand awareness. Ad dollars will continue to move to social media for this reason.

Google made a tremendous business out of “Pull” advertising. I need car insurance in Austin, I go to Google to find it. Immensely powerful. Twitter (and Facebook) are on the premise of discovery and “Push” advertising. It’s extremely useful, just not nearly as powerful so expectations need to be tempered. And for the record- GOOG only trades at 5x revenue.

Conclusion: I’m worried about some stats- only a 7% increase in sequential users vs. a 44% increase vs a year ago. So essentially you are betting on management’s ability to monetize. I’m not sure it deserves a premium to LinkedIn (my favorite social media stock for a while). Personally, buying it at the day of the IPO is a bit reckless regardless of the company.The market has outrageous valuations so we’re due for a correction, but great companies will continue to be developed like Twitter.

I will buy a small amount of my total portfolio because I believe in the company, but the risk is just too high all the social media companies are overvalued right now.