
Twitter is ‘toast’ and the stock is not even worth $10: Analyst - bontoJR
http://www.cnbc.com/2016/12/21/twitter-is-toast-and-the-stock-is-not-even-worth-10-analyst.html
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anthony-james
TL;DR: CNBC either doesn't know how to value companies, or is using a 50%
discount rate. Either of these is concerning.

Disclosure: I'm using data from their 2015 Annual reports[0]

Valuing the stock requires at least 2 subjective metrics to be defined by the
investor: The discount rate (similar to what return you could get on the next-
best-investment) and the duration you think the firm will operate. This is
because the value of the stock represents the present value of all future cash
flows the entity will earn over its life.

On their balance sheet [1] they have about 6 bn worth of assets, 2 bn worth of
liability and 4 bn worth of equity. They have enough cash and short term
investments that if they wanted to, they could pay off all of their
liabilities, and be left with property, intellectual assets and other tangible
items of value, worth about $4bn. With about 715 million shares outstanding,
the value of their company as a whole right now would be about $5.6 per
share.[2] But, that's not the whole story - we need to figure out the
discounted cash flows.

So first, how long do we expect twitter to last? Well, in their 2015 annual
report they had a 143% increase in ad-engagement and a 41% decrease in the
cost-per-ad. This tells us that they're getting more and more efficient, and
at the very least, still in demand.[3] With about $2bn cash on hand, we can
figure that they're in a position to buy out any early-stage competitors in
the near future, so can we agree that they can last at least 5 years? Awesome,
now which discount value should we use? Well if you're not investing in
twitter, perhaps you could get 10% investing in other tech companies. But for
the purposes of this example, let's say you're REALLY good, and can grab a 20%
return on your investments.

So now we do a net present value calculation. Twitter has had ~2 bn worth of
revenue per year. A 20% discount on $2bn every year for the next 5 years is
about $6 bn. $6bn divided by 715 million shares = $8.37 per share, plus the
$5.6 it's worth today gives us about $14 a share - still 40% more than what
CNBC suggests, but a little less than what it's valued at today, although
remember that this assumes an outrageous 20% discount rate. A more realistic
return would be 10%, which would put us in that $16/share range.

So if anything, I would say Twitter is slightly undervalued. They're operating
more efficiently than ever, and have taken huge steps towards making the
necessary changes to bring about transformation change. They may fail, of
course, but to say that the stock isn't even worth $10 is completely absurd
(since to get $10 per share they'd have to use a 50% discount rate and only
discount 3 years). At least if you invest in Twitter you can have a reasonable
chance at getting your money back within the next few years. Their incredible
liquidity and fair valuation is attractive, and the potential upside is not
encapsulated in the share price as of now.

[0] viewproxy.com/twitter/2016/

[1] page 65 of Annual report

[2] ycharts.com/companies/TWTR/market_cap

[3] page 44 of Annual report

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dharmon
A few critical mistakes here.

First, you have to distinguish between operating and non-operating assets. The
$4B you cite is the book value, which most certainly includes operating
assets.

If you are adding operating assets to your valuation, then you are basically
assuming that you are selling these and not using them to generate revenue.
You can only do one or the other.

You can add cash (non-operating asset) to your DCF, but you (may) have to
remove debt also, depending on what kind of cash-flow you are using.

The bigger issue is that you cannot use _revenue_ for a discounted _cash-
flow_. Twitter has significantly negative free cash flows (unless you don't
count stock based compensation, a huge number), so you have to start making
some serious assumptions about cost-cutting to get it positive to get a
positive enterprise value.

Even assuming they can swing it around to positive $100M FCF (after
reinvestment needs), that's $1B (using your 10% discount), add in $2B (we'll
assume that the $100M figure includes interest payments, so we will not
subtract debt), that only gives $3B, and that's with hefty assumptions of
cutting costs.

