Twitter – This is no flip

At this price the highest quality investor should sell.

• Twitter enjoyed an incredibly strong debut, rising 73% above the offer price to close at $44.90.
• The headlines are now stating the valuation of the company to be $24.9bn but they are still using the wrong share count.
• The basic earnings in issue is 544m but this ignores the options that have been issued and these need to be accounted for.
• I have looked the share options in detail and concluded that the right number of shares in issue is 626.1m. (see here).
• On this basis, the company is currently trading at $27.9bn, some 12% higher than most people think.
• This point is rapidly becoming moot as the valuation is extremely high no matter what share count measure one uses.
• I have compared to Twitter to both Facebook and to Google as I believe that these are the best benchmarks.
• Compared to Facebook, a much bigger, stronger and profitable company, Twitter is trading at a 2015 EV/Sales multiple more than twice that of Facebook. (25.4x vs. 9.2x).
• Twitter’s EV/Sub value is also roughly in line with Facebook’s at $78 in 2015.
• However, I believe that a Facebook user offers far greater monetisation opportunity as users spend more than 5x the amount of time on Facebook than they do on Twitter.
• Hence, a Facebook user should attract a much higher value than a Twitter user.
• The figures are even more stretched when compared to Google.
• Hence, I continue to believe that my valuation of $22.75 per share for Twitter looks right and takes into account higher growth, better corporate governance and its lower monetisation opportunity.
• Hence there are compelling reasons why even the most straight laced, longest term investor should now sell Twitter shares.
• These include:
  • The valuation is already way beyond reasonable levels.
  • There are far more shares in issue than many people think and consequently there is unexpected share dilution on the way as these options make their way into the basic share count.
  • In almost every internet IPO in recent years, investors have almost always lost money by buying in the immediate aftermarket. Even the great ones have struggled before fundamentals have kicked in driving the shares up. There is very likely to be an opportunity to buy in again lower down.
• On this basis I can see no reason why any investor would want to hold onto the shares now.
• There is only one rational course of action.