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Twitter announces IPO: The Valuation (aswathdamodaran.blogspot.ch)
57 points by Maven911 on Oct 7, 2013 | hide | past | web | favorite | 23 comments

Like instagram, the value of twitter is not (per se) in its cash flow, but in its strategic function as a competitor to other media outlets (eg newspapers) and as a complement to others (eg, live TV commenting system). This makes the market value and the (true) cash-flow value perhaps non-reconcillable, in accounting terms.

Instagram was worth $1B to FB (without any cash flow), because it could easily destroy 5x-10x that amount from FB's IPO valuation. A model for "valuation" is good CYA but nobody "needs" it when you are playing with orders of magnitude ROI. Just something to think about, when looking at valuation scenarios from Academics.

I agree. What I am curious about is what happens when the competitors are destroyed? Is there a business to keep it sustainable? With Twitter, it's admittedly a bit easier to fathom than it would be for Instagram (at least for me). But I've never been able to find an answer for this question for this type of argument.

What we're talking about is how to value a company's ability to destroy another company's value, not how to value a company's ability to create value. That's like the business of assassination. Assassins can say what their price is to kill someone. If you took that business away, and that was their only way to demonstrate worth, then what do they have left? They'd have to get into a completely different business to continue life.

So if Twitter succeeds in assassinating Facebook's value, or even the entire company (unlikely, but let's just follow the line of thought to its logical end), what next? Where's their value going to come from next? If there was valid income generation that can simply take the place of Facebook (or anything else Twitter destroys), why couldn't that value have been measured already?

Or if it is measured already, is it just like how the Internet has caused the music industry to earn digital pennies instead of the past's analog dollars? That kind of sucks overall from a valuation perspective. But at least you killed the giant!

As General James Mattis once commented on military strategy and foreign policy following lessons from Afghanistan and Iraq: "You invade a country, pull down a statue, then say 'now what do we do?'"

While this (the second paragraph in particular) is a valid point, I'm not sure I see how it applies here. The value of a stock on an exchange is an aggregate of that stock's value to many investors. The value of a stock to any one buyer will obviously be different, whether it's a grandma picking her own stocks or a large institutional player considering a buyout. The former is relevant to the IPO in the short term, the latter not so much.

Basically, I'd expect that the aggregate value on an exchange (as opposed to a buyout) going forward is going to tend to be more about the fundamentals (as the only thing that all investors have in common information-wise). At least in a scenario where there is no obvious buyout possibility in the short term.

The value of a stock on an exchange is an aggregate of that stock's value to many investors.

This is a good point. But think of supply and demand, and how the market clears. Are the VC investors going to sell based on the same models that the retail investor is using? Probably not...And since the price is the <price at which bid/ask equate>, you need to look at the diversity of views on valuation. I guess that is more what I am saying.

Notwithstanding, the valuation and its assumptions refers to, from what I understand, how a minority stock investor, such as ourselves - individuals, may value the stock for its IPO.

If you or I buy a few shares of stock we'll likely not have any "synergies" to speak of so the actual earnings power of the company is important

Just a little background on the author, hes a NYU prof and he's considered one of the formost experts in valuation, having written many book and articles on that subject

In the midst of all these pie-in-the-sky numbers being thrown around, one has to wonder if it will be another FB.


68 days after the IPO, 47% of its initial value was wiped out. It has since recovered but the suspicion stands -- were we fleeced? Was the price artificially and strategically pumped up so as to encourage investment?

I plan to buy Twitter stock as a hedge against actual intelligence in the investing community. Seriously, the true valuation on a non-profitable company with no reasonable way to make a profit is $0b.

That is until the ad money starts generating that much neede revenue. For now, valuations can be done on multiples of assets, sales or market value of similar companoes

Twitter ads are never going to produce a substantial profit. Google and Facebook have the ability to mine a ton of data that will eventually allow them to provide perfectly targeted ads that 1) don't annoy you, and 2) produce a ton of profit. Twitter knows when you last went to the bathroom. I'd expect the ads to increase, become obtrusive, and people leave in masses if that is their monetization end-game.

"I will assume that Twitter's revenues will reach $11.5 billion in 2023. That will be more than a twenty fold increase in revenues and translate into a revenue growth rate of 55% for the next 5 years, scaling down to stable growth (of 2.7%) in year 11."

"Why not use your knowledge of the future to play the stock markets? We could make trillions." "Why make a trillion when we could make... billions?"

My main issue with that number is the assumption that Twitter will still be around or significant by 2023. If the past 10 years are any indication, the internet user-base is fickle and moves around a lot. There really isn't enough data-points from the past 10 years to reliably predict trends for the next 10 years, unless you want to say that there will be tons of carcasses and has-beens.

> If the past 10 years are any indication, the internet user-base is fickle and moves around a lot.

No, you don't get it. Exponential growth is real. Ponzi schemes are the future.

You could have said the same thing about Google during their IPO, and they are doing just fine.

Not to say you don't have a point, but I think the point you are making is less to be reflected in the revenue number but in the probability of the company surviving, which he put's at 100% in his assumptions... that does sound rich to me!

They are not really the same thing. We'll always need search, and unless Google falls behind, we'll keep using Google if their search results are the best. Or unless everyone decides en mass that they can live with less good results, if the new ones offers 10x more privacy, and in a world where NSA/governments run rampant with the data collection and abuse it. Right now that's pretty much the only thing I could see Google dying from. That and laziness, but that's less likely to happen.

Communications and social platform, while they can have some pretty strong network effects, are not as important, even if they keep improving them,. A new generation of users might switch from Facebook to Snapchat, and it's irrelevant if Facebook adds the same kind of features. A new generation of users won't switch from Google to Bing, or something else, unless, as I said, Google stops providing the best results.

Whatsapp is used by more than 300 million users right now, more than Twitter. Do you think Whatsapp will still be as relevant 10 years down the road? The chances are pretty small, I think.

> [..] we'll keep using Google if their search results are the best.

People just need good enough search, not the best.

Google has proven itself as a company capable of, and prepared to move into new markets and to diversify its portfolio of services. Twitter, on the other hand, has only diversified around the 140 character concept.

In my mind, it is diversification that allows a tech company to stay afloat when new entrants can have such a rapid impact on the market.

It is in no way conceivable to me that the 'trendy' means to communicate will still be in 140 character morsels 10 years from now.

In order to value the company he MUST assume something. If you ever buy or sell a stock then you, too, are implicitly valuing future revenues, but perhaps you do so blindly. Do not ridicule the author for being explicit and transparent with his assumptions.

The day you recognize that prices are tethered to perceptions and driven by emotion, it will be a new beginning. I have deep experience in capital markets, so feel free to quiz me on anything in this space. I am here to help as I am able.

Example: How much is a dollar worth?

If you don't believe the Twitter stock is (going to be) worth anything why would you buy the stock?

Of course a valuation is for the people who are optimistic about the future of the company, because that is who you are going to sell the stock to.

A twenty fold increase in revenue is not at all unheard of, and as far as I know a standard estimate in the sector.

That sentence really jumps out at you.

WILL REACH- thats the key

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