A Value Investor's Take on Twitter

NEW YORK ( TheStreet) -- Like many, I am looking forward to Twitter's IPO, expected on Nov. 7, but not because I'll be participating. No, I'll just be watching, learning, and soaking it all in just like I did when Facebook ( FB) went public in May 2012.

You better believe, however, that Twitter's first day of trading won't be the debacle that was Facebook's introduction to the markets. The New York Stock Exchange is trying to make sure of that with rigorous testing, more rigorous, I would suspect than the treatment that Healthcare.gov endured prior to its own "IPO".

What fascinates me about Twitter's introduction to the public markets is that there's so much that we don't know about the company. We know the "product", for lack of a better term, and that there are an estimated 218 million monthly active users, who generate more than 500 million tweets per day.

We know that 2012 revenue was $317 billion and that the company lost $79.4 million, according to the S-1 registration filing. We know that revenue is growing rapidly, more than doubling for the six-month period ended June 30 to $253.6 million.

We also know that the company ended June with $375 million in cash and short-term investments, and just $80 million in debt, in the form of long-term capital lease obligations. On the surface, that's not a bad looking balance sheet.

What we don't know is what Twitter is actually worth and whether the company's prospects are as great as many assume. The initial public offering price, with a range of $17-$20 a share, puts the company's value at somewhere between $10 and $12 billion. That is thought to be priced on the conservative side, and so there's likely to be frenzy on the first day of trading that will push the price much higher. At least, that's what history tells us may happen with such a high-profile issue coming to market.

Assuming a $12 billion valuation on Day 1, which may be very low, that would put Twitter's 12-month trailing price-to-sales ratio -- using June's trailing 12-month revenue figure -- at nearly 27, and that's without the pop in share price many expect. For comparison, Facebook trades at more than 20 times revenue, which still seems very high, at least to me.

Of course, using trailing data for companies expected to rapidly increase revenue is a bit like driving a car while looking in the rear-view mirror, but those numbers are still a bit frightening in the case of Twitter, a company that has never earned a dime. FB PS Ratio (TTM) Chart FB PS Ratio (TTM) data by YCharts

I get the hype, I understand the hoopla, I am a Twitter user. I wonder, however, how many other Twitter users, like me, send out the occasional tweet, perhaps a few per week, but never bother to read tweets from those they "follow"? It's not due to lack of interest; there simply are not enough hours in the day.

There is no doubt that Twitter represents a great breakthrough in communication and social media. But there's sometimes a disconnect between price and value; everyone wants to own the overhyped shiny object that costs $20, but in reality is worth much less. Twitter may have significant value, but that is likely to be obscured by the frenzy of one of the most anticipated IPOs in our history. It's better, in my view, to let the dust settle on this one. It will, however, be fun to watch.

At the time of publication, the author held no positions in any of the stocks mentioned.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.
At the time of publication, Heller was long XXXX.

Jonathan Heller, CFA, is president of KEJ Financial Advisors, his fee-only financial planning company. Jon spent 17 years at Bloomberg Financial Markets in various roles, from 1989 until 2005. He ran Bloomberg's Equity Fundamental Research Department from 1994 until 1998, when he assumed responsibility for Bloomberg's Equity Data Research Department. In 2001, he joined Bloomberg's Publishing group as senior markets editor and writer for Bloomberg Personal Finance Magazine, and an associate editor and contributor for Bloomberg Markets Magazine. In 2005, he joined SEI Investments as director of investment communications within SEI's Investment Management Unit.

Jon is also the founder of the Cheap Stocks Web site, a site dedicated to deep-value investing. He has an undergraduate degree from Grove City College and an MBA from Rider University, where he has also served on the adjunct faculty; he is also a CFA charter holder.

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