Last Friday wasn't what investors might call a great day to own shares of Twitter (NYSE: TWTR ) . The social-networking site saw its shares fall 13% to close at $63.75, eradicating $5.2 billion of shareholder value following the company's downgrade from neutral to underperform by Macquarie Capital.
In its report, the research firm announced that while Twitter likely has attractive prospects, the significant rise in share price over the past few days cannot be justified. Given this unexpected downgrade, should investors fear that the company will drop further, or is now a prime opportunity to get in on the cheap?
Since going public at $26 per share in November, the company's share price skyrocketed to a high of $74.73. This represents an upside of 187.4% for anyone lucky enough to snag some shares, but most investors couldn't have done any better than buying them at $38.80.
Aside from share-price appreciation, investors have been excited about the company's recent growth. Since 2010, revenue for the company has exploded, rising from $28.3 million to $316.9 million by the end of 2012, and so far the company's growth doesn't look like it will end anytime soon. During the first nine months of its 2013 fiscal year, Twitter's revenue has more than doubled from $204.7 million to $422.2 million.
Certainly, such large-scale growth should be appealing to just about any investor, but when you dig a bit deeper, you start to question if the $34.7 billion company makes for a sensible investment. Every year since at least 2010, the social-media giant has seen a significant net loss. Over this time frame, the company's aggregate loss has come out to $445.7 million, 30% (or $133.9 million) of which has been incurred year to date.
Putting things in perspective
While it is possible and likely that the company will, one day, see positive earnings, the big theme on everyone's mind should be how much you are paying for how much you receive. One way to do this is to look at revenue and market cap per active user.
If we assume that analysts are right and Twitter will bring in revenue for its 2013 fiscal year of $639.1 million, then investors are receiving $2.78 for every monthly active user (MAU). Looking at only daily active users (DAUs), shareholders are receiving $6.39. To put this in perspective, shareholders receive $6.41 (or 2.3 times more) for every MAU on Facebook (NASDAQ: FB ) and $10.48 for every DAU. Unfortunately, LinkedIn (NYSE: LNKD ) doesn't post data on DAUs, but looking at the company's most recent quarterly report reveals that shareholders receive $8.26 for every MAU on the site.
Based on this data alone, shareholders would see that Twitter is less valuable than Facebook or LinkedIn by far. From a market cap perspective, the story is a bit different. Using the same data, we conclude that shareholders pay $114.37 for every MAU on Facebook and $186.95 for every DAU. LinkedIn is far more expensive at $140.38 for every MAU. Currently, shareholders investing in Twitter are effectively paying $150.96 for every MAU and $347.20 for every DAU, far higher than either Facebook or LinkedIn.
What this means is that Mr. Market believes Twitter's ability to extract revenue from each active user is less than its peers, but that it's likely to see its customer base rise significantly over time to make up for its lower level of profitability.
Looking at the company's 230 million MAUs and comparing that to Facebook, we see that the potential for growth in its user base is great. Between 2010 and 2012, we see that Facebook's user base grew 194.4%, rising from 360 million to approximately 1.1 billion. As of the third quarter of 2013, the company's growth rate has slowed considerably, as demonstrated by its approximately 1.2 billion MAUs.
If we were to assume a similar trajectory for Twitter, we should expect somewhere around 677 million MAUs by the end of 2016 who, in aggregate, will bring in around $1.9 billion in revenue. Though it is possible to say that revenue per monthly user could change considerably between now and then, Facebook saw its revenue fluctuate randomly between $4.39 and $5.47 per MAU with no definable trend.
Examining the above data, we can conclude that Twitter has a far more difficult time earning revenue from each customer, but that shareholders expect the company to experience rapid growth and, eventually, positive earnings. Though forecasting earnings at this point is probably impossible to do, we have been given a general idea of how large the company's customer base (and the amount of revenue generated by it) could become over the next few years.
If this is accurate, then the company will be far larger in the future than it is today, but it will still be anything but cheap. At the company's current market cap, it would still be trading at 18.3 times sales. Even if shareholders see a similar 25% to 30% net profit margin enjoyed by Facebook, the stock would still trade at an expensive 60.9 to 73.1 times earnings. I don't know about you, but I don't see that as a bargain.
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