America Online's dominant market position led investors toward being forgiving with regard to normal metrics, which might also be the case with Twitter. Twitter's market presence and outstanding growth opportunities will likely yield a pass on traditional metrics (as relationship to operating results, tangible book value etc. will be thrust aside).
Twitter has a large opportunity to expand its user base. Similar to America Online in the early 1990s, the key to Twitter's growth will be the opportunity to expand its consumer base. In turn, platform partners will expand their offerings, and advertisers will eye greater opportunities and engagements. According to industry sources, there are 2.4 billion Internet users and 1.2 billion smartphone users vs. only 230 million monthly active users on Twitter.
Twitter's offering is only a sliver. This is important: Twitter's projected offering of $1.6 billion (unlike Facebook's much larger offering) is simply not enough to go around. Dedicated technology funds will (out of necessity) need to have a foot in the door of Twitter. So will all sorts of growth investors. Moreover (again, unlike Facebook), Twitter's insiders are not selling any stock and have a lockup into early next year. To me, Facebook made a fundamental mistake is selling such a sizeable stake in its IPO. By contrast, selling a sliver guarantees the success of the Twitter offering.
The shares have a reasonable valuation vs. peers. The offering price will represent about 11x estimated enterprise value to sales for 2014 and 7x estimated enterprise value/sales for 2015. This compares to about an 18x multiple if we use a universe of peers such as LinkedIn (LNKD), Zillow (Z) and Facebook, but the three- to five-year sales growth rate at Twitter is expected to be about 70% annually (down from 106% growth in 2013), which is approximately twice the rate of revenue growth of the four peers mentioned above. Twitter's ratio to its peers based on enterprise value per monthly active users is low (at only $55 compared to an average of $114 for the three peers) and provides an upside monetization opportunity. The company's average revenue per user is $2.20 -- Facebook's ratio is $4.32.Bottom line: I would pay up to $32.50 a share for Twitter's common shares.
This column originally appeared on Real Money Pro at 10:37 a.m. EDT on Oct. 28.
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