As Internet valuations climb and bankers and would-be buyers circle Silicon Valley in an increasingly frothy tech market, many eyes are on one particularly desirable, if still enigmatic, target: Twitter. Discussions with at least some potential suitors have produced an estimated valuation of $8 billion to $10 billion.
Executives at both Facebook Inc. and Google Inc., among other companies, have held low-level talks with those at Twitter Inc. in recent months to explore the prospect of an acquisition of the messaging service, according to people familiar with the matter. The talks have so far gone nowhere, these people say.
But what's remarkable is the money that people familiar with the matter say frames the discussions with at least some potential suitors: an estimated valuation in the neighborhood of $8 billion to $10 billion.
This for a company that, people familiar with the matter said, had 2010 revenue of $45 million—but lost money as it spent on hiring and data centers—and estimates its revenue this year at between $100 million and $110 million.
"Are these prices justifiable based on financial multiples? No," said Ethan Kurzweil of venture capital firm Bessemer Venture Partners. But these start-ups are building social services and have lots of data about their users and "the market is valuing that mightily right now."
A Twitter spokesman declined to comment on its finances, valuations and interest by other companies. Google and Facebook also declined to comment.
Twitter, which started selling ads last spring against its business of allowing users to send messages of no more than 140 characters, is just one of many tech targets being batted about as valuations climb. In December, when it got $200 million in new venture capital, Twitter was valued at $3.7 billion.
It appears that Twitter's new valuation has benefited from several recent valuations for Facebook, Groupon Inc, The Huffington Post, Pandora Media Inc and LinkedIn:
- Facebook raised $1.5 billion in a financing that valued the social network at $50 billion, up from $10 billion in mid 2009.
- Groupon Inc, an online-coupon provider, rebuffed a $6 billion takeover offer from Google and set plans for a 2011 public offering—a prospect that had bankers rushing to Groupon's Chicago headquarters in recent weeks to make pitches.
- The Huffington Post has agreed to be acquired by AOL Inc. for a price of $315 million--about 10 times the news and commentary website's 2010 revenue.
- Pandora Media Inc., an internet music service, plans a $100 million public offering.
- LinkedIn, a business-networking website, filed last month to go public, with a likely valuation of about $2 billion, according to people familiar with the matter.
The growing valuations also reflect a psychological shift among some entrepreneurs who are opting to remain independent and grow their businesses instead of selling early for a quick return. Twitter co-founder Evan Williams and current Chief Executive Dick Costolo have already both sold companies to Google.
Both Google and Facebook have discussed buying Twitter in the past and have kept their lines of communication open, people familiar with the matter said. One of these people said companies including Facebook and Google have expressed "latent interest" in an acquisition.
On Wednesday, venture-capital firm Andreessen Horowitz said it had bought more than $80 million of Twitter shares through exchanges for private-company stock. A spokeswoman for Andreessen Horowitz declined to say what percentage of Twitter those shares represent.
Twitter's revenues and valuation have risen even as the company continues to work on ways to translate its more than 200 million registered users into a profitable business. Twitter, which was created in 2006, introduced advertising into its service last year.
One of the new Twitter ad services, called Promoted Trends, has been selling out its inventory every day, said one person familiar with the matter. The other two ad products, Promoted Tweets and Promoted Accounts, are also doing brisk business, this person said.
Despite the high valuations, Twitter's executives and board are continuing to work on building a large, independent company. People familiar with the situation said the company believes it can grow into a $100 billion company.
To do that, Twitter has been hiring engineers and increasing its work force to more than 350, up from 100 in January 2010. Twitter has also been building an executive team, appointing Mr. Costolo, a former Google executive, as CEO last year.
Twitter also hired Adam Bain, a former Fox Interactive Media president, to be its president of global sales in August. He has built a sales team of more than 20 people, a spokesman said.
"The company is having great ad-sales momentum right now, but we still think they need to do something big to increase usage and get more people seeing and interacting with tweets," said Debra Aho Williamson, an eMarketer analyst. "Most of their advertisers are just experimenting at this point; the challenge will be to get those advertisers to come back and buy more," she said.
COMMENTARY: I'm afraid to say it, but Twitter's new $3.7 billion valuation, is based more on future potential than its current revenues. Kleiner Perkins Caufield & Byers, which invested $200 million in Twitter on December 15, 2010, must believe it has a whole lot of future potential. I was critical of that investment, and pointed out that this was 66 times Twitter's revenues (I used $50 million). I must also confess that I had a lot of fun poking fun at John Doerr, a Kleiner Perkins co-founder.
I read that Andreesen Horowitz was planning on making an investment in Twitter, but I didn't know that they bought $80 million in Twitter stock through the secondary mark, namely brokers in private company stock like SecondMarket and SharesPost, which have gotten a lot of press lately.
In my opinion, Twitter is simply riding Facebook's "valuation tail" which is based mostly on hype, euphoria and a lot of greed. Their valuation is based solely on a "shadow" market in Facebook shares created by SecondMarket and SharesPost and several big venture capital firms. Looks like Twitter has joined the club. Great news for Twitter insider's to cash out, before reality sets in. There's not even an attempt to discount its Twitter's earnings to take into account the uncertainty and risk.
Twitter's "new" valuation based on comments that Google and Facebook were interested in acquiring Twitter for a price of $8 to $10 billion, isn't creditable, it's all hearsay, and should be taken with a grain of salt, so I am not even going to bother to do any valuation calculations.
For the year ending December 31, 2010, Twitter's revenues were $45 million, while Facebook's were $1.860 billion. Twitter is now valued at $3.7 billion, while Facebook is valued at $50 billion. If you do the math, the price multiple for each company is as follows:
- Facebook - 26.88 times revenues ($50 billion/$1.860 billion).
- Twitter - 82.22 times revenues ($3.7 billion/$45 million).
Twitter's price multiple is over 3 times that of Facebook. That's quite a disparity don't you think? Somebody, please explain that to me.
If you consider average revenue per user, the number's look like this:
- Facebook - $3.10 per user ($1.860 billion/600 million users).
- Twitter - $0.22 per user ($45 million/200 million users).
That's also quite a disparity. How can Twitter's price multiple be 3 times higher than Facebook's, yet its average revenues per user is 14 times smaller than Facebook's.
According to some estimates, 70% of Twitter users are passive. They may open a new account, log in once a month, don't tweet much, or never tweet at all. If you factor this into the equation, Twitter's value per user increases $0.82 per user.
None of these valuation comparisons make any sense to me. If you can figure it out, please let me know. I'm heading out to grab a bite and a beer.
Courtesy of an article dated February 10, 2011 appearing in The Wall Street Journal Technology
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