Why Twitter Could Be a Billion-Dollar Business

I believe in the microblogging service Twitter. I believe it's recession-resistant, a better source for breaking news, and worth $1 billion.

Rewind to fast forward
Fools won't be surprised by my enthusiasm. In late 2008, I predicted that Twitter would be the Big Money pick for the year ahead:

If I have to make just one prediction for 2009, let it be that next year will be the year of the platform. But not just any platform -- a platform that's simple, accessible, and a springboard for entrepreneurs and investors alike. Twitter, in other words. 2009 is your year.

So far, so good. Late Friday, company co-founder Biz Stone announced in a blog post that Twitter had accepted new funding from Institutional Venture Partners and Benchmark Capital.

"We weren't actively seeking more funding because significant capital from last year's partnership with Bijan and his team at Spark [Capital] is still in the bank," Stone wrote. "Nevertheless, our strong growth attracted interest and we decided to accept a unique opportunity to make Twitter even stronger with a very attractive offer."

Benchmark Capital partner Bill Gurley tweeted the news shortly after. Gurley, you may remember, is extremely bullish on cloud computing services in general and's (Nasdaq: AMZN  ) Web Services (AWS), in particular. Twitter, like IBM (NYSE: IBM  ) , is an AWS client, so it's entirely unsurprising that he and his partners are investing now.

Why $250 million is lowballing it
Stone's language and a post subtitle -- "An Offer We Couldn't Refuse" -- strongly suggest that earlier reports of Twitter being valued at $250 million were likely accurate. But I wonder whether those estimates weren't conservative. Twitter could command $1 billion in a public offering, right now, legitimately.

Sound crazy? Probably. Twitter has roughly 6 million active users today; a $1 billion valuation implies that each of those users is worth $167, or 42 times the approximate value of a Facebook profile.

That's troubling math. Facebook is growing at an astounding pace, and it was due to book at least $300 million in 2008 revenue. Twitter, whose user base is up 900% year over year, was scheduled to book ... none. The company has yet to publish its revenue model.

If your head hurts at this point, you're not alone. Venture capital investors -- or, in Foolish parlance, Rule Breakers -- divine conclusions from incomplete data, using history and relative benchmarks to handicap the odds of success.

Here, the best benchmark is a focus group -- a small group of individuals whose responses inform researchers hoping to understand the opinions, intent, and purchasing habits of a market. Online sources I consulted say that marketers often spend $3,000-$6,000 to establish one, or at least $300 per participant if you assume a 10-person group.

The trouble with focus groups is that they're hypothetical. Twitter, on the other hand, is a collection of conversations -- a digital "thought stream," as TechCrunch's Erick Schonfeld wrote on Sunday. Twitter allows marketers to divine both intent and action. Suddenly, $167 per user doesn't sound so crazy, does it?

Socially searching
Schonfeld's thesis is interesting. He reasons that Twitter is a better search engine than Google (Nasdaq: GOOG  ) or IAC's (Nasdaq: IACI  ) for "thoughts and events that are happening right now." He's right.

It's unclear whether Google knows this. In January 2008, during an interview with VentureBeat, company vice president Marissa Mayer gave a very different description of what constitutes social search, as you might call it.

"So if we took Web History and allowed that data to influence rankings, such that pages that your friends have visited were now bumped up in your search ranking, that that might be a good augmentation to something like personalized search. In essence, it's a fusion of personalized and social search," Mayer said then.

Surely that would be valuable. It may even be the Holy Grail for Microsoft (Nasdaq: MSFT  ) and search-sensitive social networks like Facebook, LinkedIn, and News Corp.'s (NYSE: NWS  ) MySpace. But if enthusiasm for Akamai's (Nasdaq: AKAM  ) real-time ad-delivery services is any indicator, marketers want more: instant pitches presented at the moment when they most matter to you. Twitter supplies the thought stream to enable that.

How to monetize it? Tune in tomorrow for my ideas. If you have comments in the meantime, email me here or sound off in the box below.

Amazon is a Stock Advisor selection. Akamai and Google are Rule Breakers recommendations. Microsoft is an Inside Value pick. Try any of these Foolish services free for 30 days. There's no obligation to subscribe.

Fool contributor Tim Beyers had stock and options position in Apple and Google and a stock position in Akamai at the time of publication. Check out Tim's portfolio holdings and Foolish writings, or connect with him on Twitter as @milehighfool. The Motley Fool is also on Twitter as @TheMotleyFool. Its disclosure policy is one tweet short of twitterific.

Read/Post Comments (8) | Recommend This Article (20)

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.

  • Report this Comment On February 17, 2009, at 4:52 PM, imalost wrote:

    Seems Motley Fools full time job is to hype Amazon and they can do no wrong. Each new business Amazon gets into is a billion dollars industry according to them. What they forget to tell you is that amazons growth in 2009 is slated to be zero before any downward revisions and that it sells at 44 times earnings in this economy, Pumping and hyping the most expensive stock in the S&P at this juncture seems irresponsible. They should write an article on how clean Amazons income statement and focus on giving unbiased opinion instead of their very slanted view of this overvalued and overpriced stock.

  • Report this Comment On February 17, 2009, at 5:02 PM, TMFMileHigh wrote:

    Hello imalost,

    Just to correct the record, the article refers to how bullish Bill Gurley of Benchmark Capital -- *not* The Motley Fool -- is very bullish on AMZN.

    You're welcome to criticize. I'd just appreciate it if you did so in context :-)

    Now, having said that, you may want to cut and paste your comment for here:

    I stand by my take but your points remain -- I could very well be wrong.

    FWIW and Foolish best,

    Tim (TMFMileHigh and @milehighfool)

  • Report this Comment On February 17, 2009, at 5:39 PM, imalost wrote:

    But Motley Fools seems to dig up only people that are bullish on Amazon on a daily basis. Most of the articles on the invincible Amazon in Yahoo finance are from Motley Fool. It just sad that distorted information is put into these articles. I guess it symptomatic of what happening in our country and the small investor is mislead and eventually pays the price.

  • Report this Comment On February 17, 2009, at 8:22 PM, TMFMileHigh wrote:

    Hello imalost,

    >>It just sad that distorted information is put into these articles.

    Do tell. What in my work or other Fools' work is distorted? Would love to see your detailed bear thesis for Amazon in a pitch at CAPS --

    Thanks for writing and Foolish best,

    Tim (TMFMileHigh and @milehighfool on Twitter)

  • Report this Comment On February 17, 2009, at 11:16 PM, imalost wrote:

    There are several things:

    1) I've seen your claims that Amazon is growing at 20%. Fact is EPS for this year(before analyst play their games and lower them) is $1.48 a share in 2008 it was 1.49, this blazing growth stock has zero growth.

    2) Amazon was able to make $ 1.49 a share due to a nice $ 53 million non-cash journal entry for the sale of the DVD unit, How they came up with this mega valuation no one ask, without it they would have missed their second quarter earnings.

    3) In the third quarter Amazon made their EPS by lowering their tax rate, six basis points, no one blinked.

    4) Amazon still has a huge negative retained earnings a testament that their business has always been marginal. Sure they can grow sales, but at the expense of profits.

    5) Their margins are declining and the worse the economy gets, the more competitive the environment will get. Henceforth their margins will erode further.

    6) Kindle, Kindle, Kindle is a niche market for a sunset demographic group. Young kids today are not about to buy a Kindle. The fact that Amazon won't release unit says speaks volumes. Two years running they have used the hyperbole that they are out of stock. Is planning so poor that they cannot accurately predict production, or is it a more hype and smoke and mirrors from the company. New products will be launched that will leave the Kindle in the dust.

    7) Amazon gave guidance that you could drive a truck through for the first quarter. Net Income could be down as much as 37% or up 6%. If they come in with negative growth of 15% analyst will say the beat even though net income is declining.

    8) The consumer is retrenching and every retail stock will feel the effects.

    9) Amazon sells at a PE of 45 in this environment, two to three times as expensive as WMT, AAPL, GOOG and E-bay, even though this year net income will decelerate.

    10) No one has noticed but a methodology used by Amazon to increase sales is to buy a company every quarter. Some contribute a small amount others larger, but its a trick to show sales are growing faster then they are and organic growth is masked and not clearly visible.

    10) At current EPS it would take an Amazon investor 40 years to recoup their investment through company earnings. Even if they double it would take 20 years.

    Amazon is a good company, but way overpriced at this juncture. Specially when its is so hard to tell what their real net income,organic growth and Kindle sales are. Too much risk to pay 45 times earnings in this recessionary environment.

  • Report this Comment On February 18, 2009, at 12:02 AM, imalost wrote:

    One additional items, look at their growth in A/P, are they financing themselves by extending the days to pay them?

  • Report this Comment On February 18, 2009, at 12:10 PM, KristenNicole wrote:

    i agree that search is the way to go for twitter, but its search isn't up to par yet, especially in the social sense. it's on it way though. looking forward to it.

  • Report this Comment On February 27, 2009, at 8:00 AM, LX5 wrote:

    With a $1b valuation, each Twitterer is worth $167, or x42 a Facebook profile!

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