Robert Scoble, a great technologist, recently kicked up controversy by posting an interesting piece on the value of Twitter. He points out that it is becoming cemented into the way businesses work, and is so useful that its value is now around $5,000,000,000. That is a lot of zeros for a company with no revenue.
I fully agree with Robert that Twitter will not have trouble monetizing. I also agree that Twitter is kicking Facebook’s ass in the business domain. To think otherwise is foolish. Twitter is getting bigger, and it is not going away. Robert is right, correct, and dead on until we reach his financial numbers.
He postulates that Twitter is worth “five to 10 billion dollars.” He qualifies this to a solid $5 billion at the end of his piece, so we’ll use that number. Robert points out that many businesses will in fact be willing to pay $100 a month for Twitter, or perhaps more. We will use $125 monthly, to give the rate and his thoughts a little breathing room.
Given that Twitter is an internet company with a total of three servers that are powered by goats running in large hamster wheels (or so it seems), we are going to guesstimate that their burnrate is not terrifying. Twitter reports that the company has 63 employees. At the industry standard rule of thumb of $100,000 per year per employee, we hit $6.3 million dollars a year for personel costs. They have a nice office (I dropped by and took a picture), and they have to power the site, so let’s jack up their burn rate to $8 million dollars a year. Not a lot.
$5 billion is a great valuation for a company that runs off of $8 million a year. Given Twitter’s phenomenal growth rates, well take a P/E ratio of 100, to give them a PEG of 1 assuming they are going to double in size this year (they will do more than that, I know, but it is phenomenally rare to have a PE above 100). Let’s figure out what kind of earnings power Twitter needs to do to get that 5 billion dollar valuation: 5,000,000,000 divided by 100 is a happy 50,000,000. $50 million dollars in
earnings that is, so we are going to have to assume that Twitter can pull in $58 million (to have earnings off 50, 58 top line minus expenses).
Of course, that is at a PE of 100. Google’s PE is a little less than a third of that, at 32.25. At Google’s valuation multiplier, Twitter would need to bring in over 150 million in profits to be worth 5 billion dollars.
Twitter’s current revenue: 0
Twitter’s current expenses: $8 million yearly (our estimate)
Total profit: -$8,000,000
As I said, Twitter can and will monetize. Let’s get back to that, with our businesses paying $125 a month for “pro” accounts. Now, we’ll continue to use our PE of 100, given Twitter’s crazy growth, so we need to raise $58 million dollars in revenue for the year to reach Robert’s valuation. 58 divided by 12 is 4.833 million a month. At $125 per business per month, you need 38,666 paying businesses. Hot damn.
In a nutshell, Twitter has to have handfuls of tens of thousands of paying businesses at $125 a month using Twitter to raise enough revenue to allow for a crazy PE ratio to give them the value that Scoble places on them. It is quite a stretch. Looking at the numbers, the hype, and the crazy growth of Twitter, I peg the value right now at two billion dollars. Why? It feels right. Warren Buffet said it best: “If I was a teacher, I would ask my students to place a valuation on an internet company. Any student that answered would fail.”
The man has a point. 5 billion seems to be such a reach right now based on their financial curve, that I cannot agree with it. 2 billion on the other hand seems like a price that a company might pay for Twitter, and is much easier to reach in regards to revenues. Of course, this is all hokum and speculation. Microsoft might just swoop in with an open checkbook and give us the right number.
Of course as they expand their expenses will as well, and that further adds to the costs of the business, demanding that even more revenue is raised. 5 billion dollars? Not yet.
