Twitter is Under-Valued (for Investors and Marketers) – Part 1 of 3

Twitter priced its IPO on Wednesday night at $26 a share. It has since popped on its first day of trading to $44.90, a 73% one-day increase, leading to a market cap of $24.5 billion. In context, here are the valuations of some other leading Internet social networks and content distribution platforms.

At $24.5 billion, Twitter is already close to LinkedIn’s valuation, even though LinkedIn is profitable and has more than double its revenue. Valuation can be measured as a function of future earnings potential discounted to present-day. Since Twitter is not yet profitable, we can alternatively look at revenue and how to derive revenue instead. One common metric is to look at user growth driving revenue.

Materially High Valuation Per User

Compared to some other comps, Twitter’s value per user is valued materially higher above its closest public comps, LinkedIn and Facebook.

If you plot its valuation and its users, an interesting trend line emerges.

Let’s move Facebook off the chart since it’s an overachiever and ruins the curve.

The r-squared shows Twitter and Snapchat outperforming the other comps with Pinterest and Yelp underperforming. We can initially dismiss Snapchat and Pinterest for now because they are both private companies with no monetization at the moment (also it’d take a separate post to explain it). Yelp, understandably, is less valuable because its users are restaurant goers and coffee drinkers and ads served to them will be less valuable in dollar amount. So what is about Twitter that sets it apart?

Each company uses a set of key performance indicators (KPIs) to measure performance. Twitter uses Monthly Active Users (MAU), whereas LinkedIn users Monthly Unique Visitors (MUV) instead. Linkedin uses MUVs because one common use-case is to google someone’s name and view their LinkedIn account. Comparing apples to apples, LinkedIn outperforms Twitter on MUVs. Are MUVs the correct KPI for Twitter though? After all, Twitter has something that none of the other major social networks have – distribution in the real world.

Maybe Users are the Wrong KPIs

In Twitter’s prospectus and IPO roadshow, it talks about the power of the tweet outside of Twitter. In this quarter, there were 48 billion impressions of tweets outside of Twitter properties. This is possible because of Twitter’s public, ubiquitous and real-time nature and its robust embeddable platform. But what about offline impressions?

In this example, President Obama already has a massive reach with his 37 million followers and the 800,000 subsequent retweets, reaching an additional 25 million people. This is augmented by impressions offline. The Today Show has approximately 4.7 million viewers and a popular German periodical has a circulation of 1 million readers. I can’t imagine where else President’s Obama’s tweet could have gone and Twitter probably doesn’t know either. This means the value of Twitter goes beyond Internet properties.

This is why Twitter is working with Nielsen, for example, to better capture the impact Twitter has on television and second screens to further monetize impressions in traditional media. There is no better commercial example than the tweet by Oreo during last year’s Super Bowl.

Power out? No problem. pic.twitter.com/dnQ7pOgC

— OREO Cookie (@Oreo) February 4, 2013

By leveraging its brand in a real-time distributed manner, Oreo reached a far larger audience than its Twitter followers by being broadcasted across news stations and other press. I rarely see a Facebook or a LinkedIn profile being broadcasted in this manner, do you?

If you consider the number of Twitter users to include the millions of non-Twitter users who are exposed to tweets every day through news articles or TV shows, Twitter’s “user count” is significantly higher and its valuation per user now looks incredibly cheap.

Twitter is Under-Valued for Investors and Marketers Part I

What does this mean for investors and marketers? To be honest, Twitter is figuring this out right now. We see from their prospectus and IPO roadshow that they plan on leveraging their advantages in mobile and international and will continue innovating on products like Twitter cards. We’ll cover both in Parts 2 and 3 in the next few weeks.

In the meantime, investors should recognize that Twitter’s TAM is considerably larger than projected global mobile and Internet users and Twitter is aggressively looking to create marketing products to monetize this. As marketers, stay tuned to see how Twitter can take advantage of tweets outside of Twitter properties, tweets on television and even tweets in print.

Obviously, Twitter’s success is something we care a lot about since ShareBloc is mapping the professional interest graph. If you want to check out our private beta, click here for a special invite.

Note: I don’t own any Twitter stock but I do have friends who work at Twitter so if the stock keeps going up, I could get more free drinks from them.

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