Monday, January 27, 2014

Twitter Costs Before IPO Surge With Go-It-Alone Apps- Discussion Topic 10/29/2013

Twitter Inc. (TWTR)’s operating costs are growing faster than its revenue. To understand why, consider how the micro-blogging service deals with would-be partners. (main article), 
Silicon Valley: Feel the Froth (further reading). 


  1. Thesis: Strong buy, and hold for long term
    Twitter's proposed IPO price $15-$17 values the whole company at about $11 billion, which is seemed undervalued by the Wall Street analysts, whom has a consensus valuation of about $15 Billion. In my opinion, both the underwriter and the stakeholders learnt from the Facebook failure, the deliberated undervaluation attracts more investors and allow the company to gain a growing momentum of stock price in the future.
    Outlook: The operating revenue is growing at 18% from last year, however the cost of revenue is growing at a faster rate. It is worth to mention that, R&D expense and employee salaries account for a majority of it. Those factors suggest that: 1. Twitter will be able to capitalize its assets and gain technology edges, which will enhance their data mining qualities. (Not knowing Twitter users very well has been a factor why the Ads revenue are not growing as expected). 2. Retain and developing talents help Twitter develop innovative business model. Currently, Twitter has Twiterra, an app that allow plants to send tweets when they need water, a new initiative with Starbucks. (@tweetacoffee, allow friends to buy each other coffees through tweets. It is obvious that Twitter is still a young innovative company with great potential. I believe that Twitter will find a profitable business model just as Facebook did.
    Attached is a valuation article by Aswath, Damodaran (

  2. This comment has been removed by the author.

  3. Why twitter operating costs go faster than revenue
    1. Twitter spend 87.3million more than half its revenue into R&D in the third quarter
    2. Attracts outside developers is one way Facebook, Google and Apple have kept R&D costs down but twitter did job a bad job on attracting outside developers.
    3. The revenue is decrease because As far as ad dollars flowing through its system, Twitter isn’t sharing. In mid-2010, it turned off the ability for other companies to put ads within tweet streams on their sites.

    HootSuite’s customers include PepsiCo Inc. (PEP) and Sony Music, and the company is helping Twitter by getting more brands to spend ad dollars there, said Gregory Gunn, vice president of business development

    Unlike Facebook
    1. Twitter isn't the only platform to decide who can stay and who must go. Facebook irked developers over the years by altering its terms of service, changing how payments were made and clamping down on the ability for apps to spam users.
    Yet Facebook has allowed some partners to flourish by taking 30 percent of in-app sales in games and giving the rest to the developers and has let others take advantage of the billion-plus Facebook users for job-recruiting and online dating services.

    2. Unlike Facebook, Twitter’s ability to help brands target customers is limited because users aren't providing extensive profiles on their likes and preferences, said Charlene Li
    3. They need to keep everything flowing through their system because of that lack of information

  4. For Twitter and other young growing tech companies, fair valuation is always difficult. Long term investment thesis can only based on the estimation of expected revenue and profits. Actually, I hold a conservative opinion about Twitter’ value. As an investor, I’ll not put my money on Twitter in the short run. Here are my reasons.

    First, I don’t think that Twitter limits revenue to its own instead of sharing with other parties is a wise choice. On the one hand, not sharing strategy means twitter has to spend larger percentage of its own capital on R&D compared to Facebook, Google and Apple. What’s more, the potential consumers that Twitter can reach are limited. Their profitability will be hurt by the close platform. If Twitter let other companies come together to its platform and make profits together, the final profits that Twitter can generate may be much more than the current situation.

    Second, it’s very risky that most of patents Twitter uses are owned by its employees instead of the company itself. Once those employees quit, there is nothing left that Twitter can continuously make use of. Twitter may also faces the patent lawsuits, which are time and capital costly. Data from Bloomberg shows that Twitter only owns 9 US patent, while Facebook owned 774 before its IPO. Lack of intangible assets is difficult for investors to value the firm more accurately.

  5. Investment Thesis: Strongly suggest hold in short term
    1) Reasons that Twitter is not suitable for long-term holding
    • Less support from external developers/no good ecosystem/ customer experience will be impaired
    • The fever over the internet stock is very likely to fade/ Interest rate will go up
    • Rely too much on the advertising revenue; 87%
    2) Our portfolio could be constructed under the long-term (70%) and short-term (30%) combination.
    • Long-term/value investment/stable and steady stock/mature companies
    • Short-term/surging stocks/ new energy sector/ high-tech stock/twitter (7th, Nov)/take advantage of the short-term confidence

  6. TWTR has a tendency to develop innovative products in-house higher R&D costs, higher salary expenses.
    Facebook has done the opposite. It partnered with Zynga to enrich user experience. Farmville, reaching 10 million daily active users within six weeks of launching on Facebook, was one of the most successful social games in history. In a sense, Facebook has outsourced its social game services to its partners. And I think that foresight is what allows Facebook to rapidly expand overseas, maintain its 1.15 billion active users, and makes it a great company. Google, and Apple have employed similar strategies, allowing partners such as Zynga to become big on their platform and generate a lot of revenue.
    In today’s tech world, a successful ecosystem is everything, where developers create innovative apps and get paid. If we look at the smart phone market, which is comparable to social networks market, iPhone gets its initial popularity through the Apple Store, Android has been catching up in market shares with its Google Play. Even as a desktop operating system, Windows is building its own ecosystem fast. On the other hand, those companies that fail to deliver an ecosystem decline, such as Blackberry. Personally, I think if TWTR fails to keep its commitment to build an ecosystem, the company will be difficult to keep growth going forward, even if it’s successful in controlling advertising sales.
    I agree with Stone’s comments that there might be short-term opportunities. First of all, the market view for Twitter is more or less reasonable. That means from a behavioral finance of view, there are less noise traders for Twitter IPO than when Facebook went to IPO. We all know what happened to FB, it IPO at $38, and it quickly dropped to low 20’s. Secondly, the market in the past few months have been very optimistic.

  7. Comparing Twitter's IPO to Facebook's IPO:
    • Twitter plans to price its IPO somewhere between $17 and $20 per share, aiming to raise $1.3 billion. That would make Twitter worth about $12 billion.
    • Comparing Twitter’s pricing with the Facebook Inc. IPO, which valued the company at $127 billion, as evidence that Twitter’s valuation is conservative.
    • However, if we take a look at company’s relative value based on sales and revenue rather than its stock price, we realize that Twitter loses money and has never been a profitable company. At the time of Facebook's IPO, the company was already a profit powerhouse. Facebook’s IPO valuation was 22 times trailing sales, but Twitter’s proposed valuation is actually 31 times its trailing sales.

    IPO at 5/18/2012, Share Price at IPO is $38.00
    Based on Financial Data for Year Ended 12/31/2011, (Year End before IPO)
    • Facebook’s revenue is around $3,711,000,000,
    • Net profit margin is 26.96%, Net profit is $1,000,000,000, Cash $1,512,000,000
    • Sales Multiple (Valuation/ Sales): 21.89

    IPO at TBD, Share Price at IPO is estimated $17-$20
    Based on Financial Data for Year Ended 12/31/2012,(Year End before IPO)
    • Twitter's revenue is around $316,933,000
    • Net profit margin is -25.05%, Net profit is (79,400,000), Cash $203,328,000
    • Sales Multiple (Valuation/ Sales): 31.8

  8. My opinion on Twitter is to hold in the short-term and remain conservative in the long run.

    Reasons are as follows:
    - Twitter’s profit making model is not helping it to generate enough revenue and its increasing R&D costs even widen its net loss.
    - Twitter is facing a slower user growth rate, which may impede its ad-driven revenue model. Facebook is facing the same problem but it has 4 times users than twitter
    - Lessons from Facebook IPO: shares imploded immediately at initial price $39 because of the popularity and investor’s confidence on the social media industry, but the price crashed to half over the next few month.
    - The price for Facebook is now 15% higher than the offering price because of its positive and increasing revenue and also its 1 million user base; while Twitter is continuing losing money and its user base is a lot smaller. So as an investor I cannot see potential for the price to increase in the long run.