Is Twitter's Stock Price Getting Out of Hand?

Everybody was talking about Twitter (NYSE: TWTR  ) when the company went public. Apparently that's what you get when a company that is not only in one of the hottest subsectors today (social media) but also in the business of buzz itself goes public. But the hype hasn't seemed to to have faded -- the stock just keeps heading upward.

On the day of Twitter's IPO, the stock was initially priced at $26. It's been just over a month, and the stock is now trading at about $59. That gives the company about a $33 billion market capitalization. With no profits and just over $500 million in revenue, does Twitter really deserve this valuation? The company is even looking more expensive than Facebook (NASDAQ: FB  ) . Is Twitter's stock in speculative territory?

In the video below, Fool contributor Daniel Sparks takes a look at Twitter's valuation.

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  • Report this Comment On December 17, 2013, at 4:52 PM, trismigistus wrote:

    You are contradicting yourself. Everything you said being absolutely true makes shorting Twitter a NO BRAINER, yet you say you would not short it yourself. Is there a conspiracy to keep the PPS at the current over inflated valuation until the insiders can sell their shares in February, or something?

  • Report this Comment On December 21, 2013, at 6:00 AM, 2MeterBear wrote:

    The important stat for me in that analysis is the $330 market cap per user that was cited. This would make me very cautious about value investing at this point.

    Currently TWTR is a speculative play, quite obviously and so there is quite a lot of potential in a short.

    However the unknowable is how TWTR intends to monetise its audience. Its current profit is based on a very small volume of very high value sales of its firehose to corporations. I forget how many millions it costs to have access to TWTRs data maybe $10m? Its significant. Now ask yourself what this says about the value of TWTRs users and content.

    If TWTR finds a way to sell that value to a broader base of users then the potential for increased revenue could be very high.

    Keep your eye on that $330 market cap per user, its critical. If you owned a gold mine, its market cap would be expected to represent the value of the gold beneath the ground, its reserves and future earnings potential. Similarly with Twitter. That number says that over the lifetime of the corporation each user can generate at least $330 in revenue as the reserves are 'mined'.

    It isn't necessary that each user 'spend' that amount, far from it. What it says is that to an advertiser or purchaser of the right to market to each user is of sufficiently high value that over the long term advertisers will end up as a group paying $330 to access the Twitter user base.

    This is analogous to the multiplier effect in derivatives trading. A single $1 of actual commodity may be ultimately represented by $1 million in derivatives contracts, options etc.

    So while that figure of $330 seems huge it would be foolish to see it as a deal breaker.

    So, considering advertising and marketing, until we know how Twitter could utilise their user base we don't know what the future revenue will look like. Its a gamble, a speculative play.

    Actually I think Twitters greatest revenue will not be via advertising and marketing for the simple reason that these activities are not a natural match for the strongest point of Twitter in that it is a network of social trust. Instead I think its potential is much greater than that, but I'll let everyone else work out what that might be.

    Suffice it to say, I can see a day when Twitter is worth $100Bn and an investment in todays terms will triple in value. If it happens it will take maybe 5 years, and what Twitter have in mind might not work. The team does however have a good track record in innovation and in reality that is what I am investing in, not the current business model but the future one.

    In the meantime, volatility and the vagaries of bloggers and the media will generate news flow to drive the value of TWTR up and down. I look forward to buying more shares at a lower price as the shorts make their temporary speculative gains.

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