Twitter, You've Gone Too Far

Source: Twitter prospectus.

Once upon a time, Twitter (NYSE: TWTR  ) set an initial pricing range for its IPO at $17 to $20. At $17, Twitter would be worth $11.8 billion. Even at $20, we'd be talking about a $13.9 billion company. That would have been a steal, even though that valuation would be about 26 times sales. Heck, I probably would have even bought in at that price.

Those days are gone. Twitter subsequently boosted its pricing twice ahead of today's debut; the company increased it to $23-$25 shortly before officially pegging the offering price at $26 last night. Then Twitter made its debut just before 11 a.m.

Shares opened at $45.10, a solid 73% higher than the offering price. Shares even briefly broke $50 in the first few moments of trading. With nearly 700 million shares outstanding (including restricted stock and options), that opening price valued Twitter at $31.1 billion. That sales multiple we spoke of earlier? Shares are now trading at over 58 times trailing sales.

I like Twitter's business and its growth potential, but that's simply too expensive for this Fool. Twitter has gone too far.

Inevitably, investors will draw comparisons to Twitter's closest peers, Facebook (NASDAQ: FB  ) and LinkedIn (NYSE: LNKD  ) . Facebook trades at 17.6 times sales, while LinkedIn's multiple sits at 19.

Twitter's $31.1 billion market cap has already overtaken LinkedIn's $26 billion, despite the fact that LinkedIn has profitably generated over two and a half times more revenue over the past year. Additionally, LinkedIn's monetization model is far more resilient, and it has three operating segments.

LinkedIn's registered member base of 259 million is only slightly larger than Twitter's worldwide monthly active user base of 232 million. In contrast, Facebook's MAU base stands tall over its rivals' at nearly 1.2 billion. Facebook's advertising business is more comparable to Twitter's, but Facebook's vastly stronger network affects appeal more to advertisers.

Twitter is still in the early days of monetization, and continued improvement on this front will grow the top line even in the absence of user growth. Domestic MAU growth has seemingly tapered off, although Twitter encouragingly added 4 million MAUs stateside last quarter. International monetization is also just 1/10 of what it is domestically.

Without a doubt, Twitter has some very real opportunities going forward, and its unique role in social media as a public broadcasting service is differentiated from Facebook and LinkedIn. Still, $45 is just too much.

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