Why $700 Million Is Too Much For Twitter

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Why $700 Million Is Too Much For Twitter

Rumors have been rampant this week about Apple (NSDQ: AAPL) using some its $29 billion war chest to buy Twitter for around $700 million. Plenty of bloggers are speculating about whether these rumors are true—we won’t waste your time with more of that. (And Twitter Founder Biz Stone said straight out on The View today that Twitter was not for sale). We’re more interested in the $700 million figure: Specifically, if Twitter were to be sold, is that the right price for it?

Internet companies with a lot of users but little-to-no revenue are often valued based on their number of visitors. Twitter reaches 18-19 million unique monthly visitors, according to comScore (NSDQ: SCOR). That $700 million price tag would then value the company at about $40 per visitor. How does that compare with the prices paid in some of the big social-media acquisitions of the last few years?

—YouTube was bought for about $16 per user.

—MySpace for $21 per user.

—Bebo for $35 per user.

More analysis, after the jump

Twitter is growing at an enormous clip—almost doubling its audience in March—and any interested buyer could legitimately base its valuation on what they think the size of Twitter’s audience will be a couple of months down the road. Still, if someone were to buy Twitter today, $700 million seems a bit dear, particularly given that we’re in a recession and Apple is known for being shrewd about the prices it pays to buy companies.

And, if you reduced the per-user multiple down to within the range of these other acquisitions, you’d have another problem: the VCs won’t be happy with their return. For example, at $18 per user, which is in the mid-range of the YouTube and MySpace valuations, the price tag would drop to about $300 million. But Twitter’s VCs, who have invested $55 million in the company over the past two years, would wind up with what is by their standards a mediocre less-than-five-times return on their investment (assuming typical founder stakes). VCs typically look for at least double that, particularly with a company that has as much buzz as Twitter does.

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Rory Maher May 6, 2009 2:22 PM ET

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Aravind

Compared to You Tube, MySpace and Bebo.. the buzz around Twitter is unimaginable. Everyone who is talking of 360 degree online presence, cannot leave twitter behind. Its more like the dot.com bubble; the practical usability will be justified only in the long run.

One thing everybody needs to agree that Twitter is neutral and everybody wants to tweet. Very less people might know about Micro blogging but everybody knows about twitter. Starting from Google, GE to the store next door everybody is tweeting..but the same is not the case with social networking sites like MySpace, YouTube, Orkut or even Facebook.

Johnny Five

In the end, this is all simply meaningless chatter. Life is meaningless. We don't need to end it or anything, but let's just relax a little bit with the realization that these issues are really not that important at all.

Ken Leebow

Quite possibly, Twitter could be the next Macarena.

van

700 mill in these times is a bloody disgrace. Who would ever pay to use twitter? It is a nice have but not a "must have"!

guy

None of the big social media businesses are making anything like the kind of money that justifies the investments made in them.. They all have serious content ownership issues, and any function creep that Twitter might be susceptible to will lead to the same situation.

Advertising is also not something that the Twitter users would accept. Where is the space to place them and who has the time to read them? Immediacy of the degree that Twitter offers is its main attraction.

Celebs (the users who draw most of the rest of us to Twitter) would be unhappy to associate with brands indiscriminately (and so would the sponsors who already pay them). Corporate users would not place the brands of competitors on their services, and would also hardly tread the minefield of brand complemtarity with their staff either.

Wait.

Matt

Will someone please build a giant neon sign in the bay area that glows all day and night with the words "10X is gone baby gone"!!! Then maybe these wishful, fanciful, delusional investors believing that the good 'ole days are still here will finally realize it's over…you know, a cold bucket of water through optical osmosis.

I mean really, Twitter is just great, but $700 million? Please, get an effing clue… and they don't even know how they're going to make real money. I can see the Powerpoint "based on our projection of multiple, hypothetical, unrealistic revenue projections" (zoom to perfectly exponential growth curve), we conservatively (cough) place our value at $700m.

All this capital is sitting around looking for 10xers and guess what, they're pretty much like building a business around buying lottery tickets. Man up and tell your investors you can't deliver and get back to buying a business because it makes money. Why? Well, last I checked, people are willing to pay money for something they value and if you can't get consumers and/or biz to pay for Twitter, or content/intelligence derived from Twitter, it doesn't sound like a business, rather a public works project.

Old school is the new, new school….whew, ok, I just had to vent.

Mike

Wait - what if you backed this out based on hypothetical earnings…

$700,000,000 purchase price.
call it a 60X multiple of earnings
= ~$12,000,000 yearly earnings on which to base the multiple.
Doesn't that seem high?

Rory Maher

Fair enough point on the apps, though my guess is that is nominal. As far as ad revenue, I wouldn't say that YouTube, MySpace, and Bebo were purchased for ad revenue. It remains to be seen how Google, Fox, and AOL will make the most money from those businesses. I would imagine they had a longer-term vision that incorporates revenue streams beyong advertising - in fact they have started to dabble in commerce recently.

the weakonomist

You forget that twitter's visits on comscore would only include visits to Twitter.com. With Tweetdeck, tritterfon and all the other twitter viewing apps you've got a lot more eyes.

Also you're comparing Twitter to companies purchased for ad revenue. Who says Twitter intends to make money on ad revenue? Even I've written about other potential business models, surely paid content has too.

nathanr

Twitter should sit back and hold tight for at least a billion by getting Apple, Microsoft & Google atwitter in a bidding war. All three would benefit from the service and putting a monetization strategy against it more deftly than how YouTube has been monetized.

As a user, Apple would allow Twitter to retain their "cool" factor and brand association whereas Microsoft & Google wouldn't allow Twitter to retain their cool factor with Twitterers.