Is Twitter Inc Ridiculously Cheap?

Source: Twitter

The year of 2014 has not been kind to Twitter (NYSE: TWTR  ) and its shareholders. Even though the company reported revenue and earnings that surpassed analysts' expectations for the first quarter of its 2014 fiscal year, shares of the social media giant plummeted nearly 9% after the release. However, this isn't the first big drop the company's seen. During the month of April, shareholders saw their stock drop 16%. Year-to-date, the situation looks even worse as the shares have fallen 39%. With the shares trading so far from their highs, is the company a bargain buy or should investors consider Facebook (NASDAQ: FB  ) instead?

Twitter's not the growth story it used to be!
For the quarter, Twitter reported revenue and earnings that surpassed analysts' estimates, but the company failed to add the number of subscribers that investors wanted to see. Year-over-year, Twitter's revenue jumped 119% from $114.3 million to $250.5 million, handily beating the $241.5 million that Mr. Market had anticipated. Adjusted earnings also did better as the company broke even on the bottom line, up from the $0.03 loss it reported last year.

On a subscriber basis, however, Mr. Market seems a bit perturbed. During the quarter, the company added 14 million monthly active users, or MAUs, to bring its base to a whopping 255 million. Although this sounds like great news, the 6% growth rate implies that the business isn't growing rapidly enough.

Source: Twitter

To put this into perspective, Facebook, which has a much larger user base than Twitter, saw its MAUs grow more than 4% from the previous quarter. On a year-over-year comparison, the 25% growth rate in MAUs seen by Twitter isn't much better than Facebook's 15% growth rate when you consider the size difference between them.

Is Twitter a bargain, nonetheless?
Yes, it is true that Twitter isn't the kind of growth engine investors wanted to see, but is the company cheap enough that it's hard to pass up? Because of the fact that management has yet to reveal earnings or meaningful cash flows, analysts can best value the company using revenue and MAU metrics.

Using the company's 2013 revenue of $664.9 million and its current market cap of $23.20 billion, we find that investors who take stakes in Twitter are valuing it at almost 35 times sales. What this means is that, for every dollar in revenue the company generated, investors paid $35. Even after taking into consideration management's expectations of $1.20 billion to $1.25 billion in revenue for 2014, the cost to the company's shareholders comes out to between $18.60 and $19.30 for every dollar in sales.

  Twitter Facebook
Price/Revenue using 2013 Revenue $34.90 $19.20
Price/Revenue using 2014 Forecast $18.60-$19.30 $13.30
Price/MAU $91.00 $122.80

Source: Twitter and Facebook

In contrast, investors who buy stakes in Facebook are paying just $19.20 for every dollar in revenue. Taking analysts' expectations of $11.83 billion in revenue for fiscal 2014, the price of Facebook looks even more attractive, with investors paying just $13.30 for every dollar in sales. From this perspective, Facebook is remarkably cheaper no matter how you stack it.

However, what about using each company's MAUs as a proxy? Using Twitter's and Facebook's most recent MAUs of 225 million and 1.28 billion, respectively, turns the tables. Right now, investors in Twitter are paying $91 for every MAU of the company. While this seems high, it's a pretty steep discount from the $122.80 investors are paying when they buy up a share of Facebook.

Foolish takeaway
Based on the data provided, it looks like Twitter's days of rapid user growth might be behind it. In spite of this, the business looks relatively cheap (when placed next to Facebook at least) on an MAU basis. However, users don't account for much if the company cannot make money from them, which likely makes the revenue comparison more appropriate.

Under this valuation system, Twitter is significantly more expensive than Facebook and, unlike Facebook, it has yet to turn a profit or create strong cash flows. Although this does not mean that the company is a terrible investment, it does suggest that Facebook might make for a more attractive prospect for investors who have a craving for social media.

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