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Twitter: What’s it really worth when you don’t know what it’s for?

By Andrew Moss

November 8, 2013 | 6 min read

Twitter's flotation on the New York Stock Exchange yesterday, the feverish trading on the first day and the controversies that surrounded it got me – and, no doubt, thousands of others – thinking: “Is it really worth that much?”

Twitter hits the stock exchange

Now, most observers would say: “Surely it’s worth whatever anyone will pay for it.” That’s of course true to a degree, but a company is a rather more complex entity than the used car or the old Beatles LPs you’re planning to sell on eBay.

This is where the grumbles about Twitter’s IPO come from. Many analysts and investors feel that the $26-per-share (giving a total value of $14bn) Twitter and its advisors Goldman Sachs came up with was a price, not a value. They say that the company – which has never made a profit – was trading at over 20 times revenues. Compare that to Apple (the world’s second most valuable company, and one which makes real products and sells them), which is at the time of writing trading at two-and-a-half times revenues, and you might be forgiven for seeing a bubble in grave danger of bursting.

So where did Goldmans and Twitter get their price from? There’s a more than very good chance that they looked at last year’s Facebook IPO and the $1.1bn Yahoo! paid for the micro-blogging site Tumblr a few months back.

We’ll return to these in a moment, but first let us consider Twitter itself. There can be no doubt that Twitter is a brilliant, easy-to-use service, based on a brilliant idea. In certain circumstances – when big news is breaking, for example – it really comes into its own. In a highly mobile, permanently-switched-on world, Twitter is the perfect medium.

Yet its founders have never found a way of making money from it. Between January and September this year, Twitter bought in just $422m in revenues – not even enough to cover its outgoings. Most of that money came from advertising, and most of it (75 per cent) was from America. One could be forgiven for wondering what all the fuss was about.

However, as well as the doubters, there has been no shortage of the faithful. As I write this, Twitter shares are trading briskly.

And our old friend, WPP chief executive Sir Martin Sorrell, who knows a thing or two about marketing communications and who is not usually prone to incautious shows of enthusiasm (particularly where his money is concerned) went on record earlier this week saying that Twitter wasn’t necessarily overvalued.

He’s said many times in the past that he sees Twitter as “a PR medium, not an advertising one” – meaning, I think, that he sees data and information supply, rather than selling advertising, as a primary source of income for Twitter. And I think he’s right. Twitter’s 250m-plus users will only be able to take so much advertising, and so many sponsored tweets, before they start abandoning the service in favour of pastures new. But real-time data, which can tell brands what’s being said about them, by whom, and where and when, is potentially hugely lucrative for whomsoever can provide it (assuming any problems with Data Protection Act-style legislation can be overcome, of course). I can see brands queuing up round the block for that.

And before delivering a definitive judgement on the value (or otherwise) of Twitter, we should return to Facebook. Last May, when the IPO was announced, shares were priced at $38. On the first day’s trading they shot up as high as $45, valuing the company – which had never made a profit – at over $100bn. Thereafter the share price moved, mostly downward. There was much talk of a bubble and the shares bombing (at one point, in September last year, they sank as low as $17.55), but as I write this, Facebook’s share price is over $49. This is because Facebook unveiled a new ad format back in March and advertisers have been queuing up to take advantage (it’s comparatively cheap and produces a decent response rate, so no wonder it’s popular).

What looked, say, a year ago, like folly may well turn out to be a shrewd investment. I think as time goes on and we work out what Facebook (and Twitter) actually is, and how people really use it, we will begin to know how we can monetise it in new ways, rather than just bolting on advertising.

There is one big lesson to be learned from this – if you’re investing, particularly in tech or marcomms stock, you need to play a long game and you need a strong stomach and stronger nerves.

Whatever happens with Twitter shares over the next few days, weeks and months won’t be an indication of its long-term value, or of its future. It’ll probably vacillate between being massively overvalued, then wildly undervalued. Providing costs are kept under control, users stay loyal and the big investors hold their nerves and give the management time to develop the business and its revenue streams, it could prove to be a decent long-term investment.

As the Chinese revolutionary Zhou En-Lai (1898-1976) is alleged to have said when asked, 175 years after the event, what he thought the significance of the French Revolution was: “It is too soon to say."

Only in five, 10 years’ time will we see the true value of Twitter. It may even be that only our children and our grandchildren – not us – will know.

Andrew Moss is a partner at Green Square, corporate finance advisors to the media and marketing sector.

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