Twitter – Perfect timing.

Twitter is expensive but at least it is fairly governed.

• While Samsung has reported earnings that were broadly in line with expectations, the real interest is around the filing of Twitter’s S-1.
• The pre-IPO document reveals that the company is seeking to raise around $1bn at a valuation of $12.4bn (22.4x EV/Sales on RFM estimate of 2013 sales of $550m).
• This compares to FaceBook on 16.3x 2013E EV/ Sales and Google on 4.9x 2013E EV / Sales.
• By comparison Twitter is expected to grow at 91% this year while Facebook and Google are expected to grow at 44% and 18% respectively.
• It is upon these growth rates that I expect that the valuation of Twitter has been set.
• The big question is how sustainable that growth is and at what pace will it slow?
• When I look at revenues from monetising Internet traffic, the key to sustainability remains the Digital Life pie. (see here).
• The Digital Life pie shows how much of a user’s activity that an ecosystem has a service for.
• It is therefore an approximation of degree to which a user can live the entirety of his or her Digital Life within that eco-system.
• Google services cover 66% of Digital Life while Facebook covers only 33%.
• Twitter covers a tiny 7%.
• Facebook’s sudden growth spurt is all about monetising mobile traffic more effectively and very little to do with growth in underlying traffic. 
• This means that once it has maximised monetisation from its 33%, growth will slow unless it can cover more of the Digital Life pie.
• Facebook Home and other such efforts have been aimed at doing this but to date have been miserable failures.
• By the same token, Twitter faces exactly the same issue and given that its coverage of the pie is much lower than Facebook’s, its revenue is likely to plateau at a lower level.
• Hence, the critical issue for Twitter is to cover more of the pie and there are signs that it is attempting just that.
• Until it has properly covered more of the pie, I am always going to worried that growth could grind to a halt at any moment.
• A back of an envelope calculation would indicate that this is likely to happen somewhere around revenues of $2bn which should be hit somewhere in 2016.
• Hence for now, growth looks pretty safe.
• A huge plus for Twitter is corporate governance where all of the shares carry the same voting rights.
• The same can not be said for either Google or Facebook and for this reason I would give Twitter at least a 30% premium over either company even if they were growing at the same rate.
• Twitter’s timing is perfect with Google not far off all-time highs and Facebook having covered its mojo.
• Hence, I am sure the issue will go well and the stock should perform nicely for at least the next 18 months.
• I am just worried about what its low coverage of Digital Life means for growth when revenues start to nudge the $2bn mark.