Twitter Is No Leap of Faith


From Wall Street to Silicon Valley, it’s hard not to hear chatter about Twitter, the most highly anticipated initial public offering since Facebook.

Skeptics abound, questioning the company’s fundamental metrics. Where are the profits? What will the price-to-earnings ratio be? What has this company done so far that could possible justify a projected valuation of $16.5 billion? And, understandably, could Twitter’s offering be a rerun of Facebook’s, a financing blooper that will long be remembered as the Rodney Dangerfield of IPOs?

These would all be reasonable posits if Twitter were just another run-of-the-mill company. But it is not. Twitter is a very rare commodity. For investors, this little tweeting upstart, with its 232 million active users who share thoughts and ideas in just 140 characters at a time, is one of the pure bets on the future of the Internet. More than that, it is a bet on the handful of core platforms that reach, connect and engage billions of people across the globe.

Looking around, fewer than 10 public companies in the world fit that bill and are therefore reliable indicators for anyone mulling Twitter’s valuation prospects. They are Google, Tencent, Alibaba, Baidu, Amazon, Facebook, LinkedIn, eBay and Apple.

These are the primary platforms on which the public depends for Internet and mobile use. The mean market cap for these companies: $160 billion. The median market cap: $100 billion.

You can see where this is going. If Twitter has the potential to be the next Google or Amazon or Tencent, what would you pay for that option value?

The naysayers will argue that the same case could have been made for Facebook when it went public in 2012, only to see its stock price sag 52 percent from its offering price over the subsequent three months. They are right, of course. But the difference now is that Twitter has learned from Facebook’s missteps, and is determined not to repeat them.

For instance, Facebook arguably waited too long to go public because it was already a really big company, thereby making it difficult to predict substantial growth in its future. By contrast, Twitter is still relatively close to the start of its formidable growth curve. Whereas Facebook flooded the market with available shares, driving down demand on its opening day, Twitter is keeping the size of its offering small. And, while Facebook priced its IPO for maximum value, Twitter is keeping its valuation in the modest range, hoping to see a pop in share price when it finally opens for trading.

To be fair, it needs to be said that Facebook’s stock has flourished since its anemic debut. The company’s share price is up 87 percent since the first of the year, and 31 percent above its IPO price. Moreover, Facebook is among the top four best-performing large-cap technology stocks in the U.S. so far this year, according to Morningstar research.

Facebook’s stock surge bodes well for those underwhelmed by Twitter’s current revenue sources or nonexistent profit. History tells us that when any new platform emerges, it takes some time to figure out how best to make money in ways that are endemic to that platform.

Think LinkedIn. Think Amazon. Neither company was profitable when it went public, but I bet you wish you’d had a piece of them then.

For those who still aren’t convinced, let’s throw in one more bit of information. Twitter’s revenue over the next 12 months is expected to surge some 85 percent, from $535 million to $990 million. When Facebook went public, its projected 12-month revenue growth was a comparatively paltry 36 percent.

Bottom line: Twitter’s growth prospects today dwarf those of Facebook at the time of its IPO.

Twitter simply is not the leap of faith many would have you believe. If you are a portfolio manager with holdings in technology, you need to be betting on the future of the Internet and mobile. If you are betting on the Internet and mobile, you need to own the platforms. If you own Google, Facebook and Amazon, then you will need to own Twitter, too.

You don’t need 140 characters to understand that.

Geoff Yang is a founding partner at Redpoint Ventures in Silicon Valley. (Full disclosure: Though not a direct investor in Twitter, Redpoint does own stock in the company thanks to two acquisitions, Bluefin Labs and Posterous.)

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