Official Twitter icon. Source: Twitter.
Twitter shares could hit $50 this time next year, according to Suntrust Robinson Humphrey's Rob Peck. Initiating the stock at a buy, the analyst believes the social network has jolly days ahead.
Rob Peck's bullishness
Peck's bullishness on the not-yet-public shares comes as a surprise this early in the game. Not just because it's less than a week after the company filed its registration statement, but also because Twitter hasn't yet set its offering price. So, jumping to a price target -- let alone a buy rating -- seems a rather premature.
But in an attempt to understand his reasoning, it's possible to come up with some ballpark figures to estimate the extent of his bullishness. Though Twitter didn't yet specify how many shares it will offer, it did estimate that there would be around 472.6 million shares outstanding after the offer. At $50 per share, that would give the company a market capitalization of about $23.6 billion, more than double Twitter's recent valuation of itself at $9.7 billion.
A $23.6 billion valuation for Twitter is certainly bullish. That would give investors in Twitter's last offering of restricted stock unit, or RSU, grants, an incredible return -- with the last RSU grant at $20.63 based on 472.6 million shares. Even more, a $23.6 billion valuation would put Twitter at one-fifth of Facebook's (FB 1.91%) current value, and just about $3 billion short of LinkedIn's (LNKD +0.00%) $26.6 billion market capitalization.
The comparison with LinkedIn, in particular, really shows just how bullish this outlook is. LinkedIn reported $1.24 billion in trailing-12-month revenue and a trailing-12-month profit of $40 million. During the same period, Twitter reported an operating loss of just $448 million in revenue. For Twitter to trade just $3 billion short of LinkedIn's forward-looking $26.6 billion valuation, Twitter is going to need to have one incredible year.
Beyond the uncertainty regarding the share price, Peck's vague reasons for bullishness on Twitter's underlying business provides more reason to ignore the analyst's early call. He believes the company will grow trailing-12-month revenue from $448 million to $600 million for the full year and then go on to double revenue in 2014. How will Twitter accomplish this? Long-term growth opportunities, a differentiated experience, scale, and a real-time interest graph will drive the company's success, he says. Sounds like fluff to me.
Why Twitter could be a bad investment
Aside from valuation, a great way to initially filter a stock is to look at the underlying business' durability. Twitter's network effect and its unique niche among social networks reinforce the its durability, giving Twitter a winning score on sustainability. But for an investment like Twitter, which will likely trade at an extremely forward-looking valuation, investors need more than a sustainable business model -- they need sustainable growth prospects, too. And that's where Twitter's future is less certain.
One reason to regard Twitter's growth trajectory dubiously is because its already small base of users may be more limited than investors realize.
At just 218 million monthly active users -- or MAUs -- Twitter is considerably smaller than Facebook. Facebook boasts 1.15 billion MAUs and 699 million daily active users. Many ad buyers prefer Facebook to Twitter simply because Twitter is significantly smaller than Facebook, according to The Wall Street Journal. "You just can't ignore Facebook," Progressive's chief marketing officer Jeff Charney told the WSJ. Charney couldn't say the same thing about Twitter.
Even LinkedIn boasts 238 million registered members. And LinkedIn's target audience of professional knowledge workers is arguably more limited than Twitter's. Notably, however, LinkedIn's registered members metric does not indicate MAUs, instead simply registered members. Even so, LinkedIn's registered members represent a much more narrowly focused target market. Facebook's Instagram isn't far off from Twitter either, at 150 million MAUs. Could Twitter's potential audience be smaller than people realize?
And, unfortunately, the region where Twitter's monetization is the highest (U.S.) seems to be hitting a ceiling in MAU growth. As Fool tech bureau chief Evan Niu pointed out, ad revenue per 1,000 timeline views in the U.S. generated seven times the revenue per 1,000 timeline views internationally. And the U.S. accounts for a large portion of the company's MAUs, at 22%. But despite the region's obvious importance to operating results, MAUs grew just 2% sequentially in the company's most recent quarter. Comparatively, Facebook was able to grow its much larger base of MAUs in the U.S. and Canada by 1.5% in the same period.
While the looming question when Facebook went public was whether or not the company could monetize mobile, the question that will haunt Twitter's IPO is whether or not the social network can reinvigorate domestic MAU growth. Otherwise, the company's place among larger digital advertising peers Facebook and Google may be undermined.
And contrary to Peck's silly buy rating, not having a price for Twitter's IPO makes it impossible to say whether or not the stock will be a buy. But if a rating must be made on the untraded stock, it probably shouldn't be a buy. LinkedIn's slowing domestic business may indicate bad news for this growth stock.
