Twitter Looks Cheap Compared to WhatsApp

If Facebook (NASDAQ: FB  ) paid $19 billion for WhatsApp, should you buy shares of Twitter (NYSE: TWTR  ) when it's valued at $21 billion? Professional investors price shares of a company on a multiple of future profits, but the whole company could be bought -- or an equity stake could be taken -- if individual shares become too cheap. This comparative valuation may set a floor for the price of Twitter near its current price of $37.50.

Shares broke the IPO low price
Shares of Twitter traded below the $38.80 post-IPO low in early trading Wednesday after the company reported better-than-expected financials but weak growth in monthly average users. Figuring out which metrics to look at is a trade-off between profitability for growth. Early stage companies reinvest any available profits to build a client base and prevent competition from taking share. However, when the growth slows, the company's valuation falls back to a multiple of earnings. This may not happen to Twitter, though, if investors or a competing company decide WhatsApp is a fair comparison.

Revenue of $250 million was ahead of the $240 million estimate, but 255 million monthly active users was just in line with expectations and up only 14 million from the prior quarter. These are healthy growth numbers, but not so dramatic that valuation can be completely overlooked.

Twitter cannot be valued on an earnings basis
In the case of Twitter, growth is slowing but profits haven't materialized; GAAP earnings were a loss of $0.23. Even non-GAAP earnings, which back out expenses from stock option compensation and acquisitions, were $0.00. Since there is likely to be little profit in 2014, earnings multiples are not an adequate way to find a fair value for the shares.

The price-to-sales multiple looks expensive
When a company is unprofitable, but likely to turn a profit in the future, a more forgiving multiple like price to sales can be used. Revenue guidance for 2014 was for a range of $1.2 billion to $1.25 billion, which would lead to a price-to-sales multiple of 17 times if Twitter hits the high end of guidance. However, even if this multiple was cut in half, it would look expensive.

Compared to WhatsApp, it looks fairly valued
Looking past internal valuation, does the stock look cheap when compared with recent acquisitions? Facebook paid $19 billion dollars for WhatsApp's 500 million "regular, active" users. This amounts to $38 per active subscriber. Twitter, on the other hand, has 255 million monthly active users and a market cap of $21 billion. This values Twitter subscribers at $82, or a little more than double the value of WhatsApp subscribers.

If Facebook is willing to pay $38 for a subscriber who doesn't see any advertising, are subscribers who see advertising worth twice as much?  Maybe. Twitter brought in approximately $1 per subscriber in the quarter, where WhatsApp plans to bring in $1 per subscriber each year after the free first year of service.

Using this comparison, a person could make a case that Twitter is fairly valued at $37.50 and could grow from here as subscribers are added and new methods of monetization are found. This valuation method may seem like a bit of a stretch, but since individual investors are competing with other entities for investment opportunities, you need to consider what a company would pay, and not just what other investors would be willing to pay.

Will this stock be your next multi-bagger?
Give me five minutes and I'll show how you could own the best stock for 2014. Every year, The Motley Fool's chief investment officer hand-picks 1 stock with outstanding potential. But it's not just any run-of-the-mill company. It's a stock perfectly positioned to cash in on one of the upcoming year's most lucrative trends. Last year his pick skyrocketed 134%. And previous top picks have gained upwards of 908%, 1,252% and 1,303% over the subsequent years! Believe me, you don't want to miss what could be his biggest winner yet! Just click here to download your free copy of "The Motley Fool's Top Stock for 2014" today.

Read/Post Comments (0) | Recommend This Article (2)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2941355, ~/Articles/ArticleHandler.aspx, 8/28/2015 8:32:14 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

David Eller

I started contributing to the Motley Fool in 2013. I have held research positions at two investment banks and two hedge funds before trying more entrepreneurial ventures. I'm passionate about helping people find freedom in financial independence. Feel free to add comments and start a discussion. I hope to use these articles as forums to learn from you as well as share my opinion.

Today's Market

updated Moments ago Sponsored by:
DOW 16,643.01 -11.76 -0.07%
S&P 500 1,988.87 1.21 0.06%
NASD 4,828.33 15.62 0.32%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

8/28/2015 4:01 PM
TWTR $26.83 Up +0.37 +1.40%
Twitter CAPS Rating: ***
FB $91.01 Up +1.28 +1.43%
Facebook CAPS Rating: ***