Twitter’s valuation has been pegged at around $8 bn this year, as a result of a Q3 financing round led by DST. It’s a hard number to swallow, and there are plenty of critics who don’t think the social media company can hit that number even if it waits until 2013 to go public. According to Motley Fool, Business Insider Research putsTwitter’s revenue potential at $2 bn, which would help with the valuation. But even that might be wishful thinking.
The Fool reports that, according to leaked documents, Twitter is expecting to reach top-line results of merely $140 mn this year … a far cry from Facebook’s projected $4 bn. So, what does that say for the microblogger’s worth?
Well, if we assume staggering margins of 50 per cent, that would mean earnings of $70 mn for the year – not exactly plausible. Nonetheless, if we take that number and apply an absurd multiple of 100, we start to approach the implied valuation from Twitter’s last financing round. Take the ridiculous earnings assumption and a 10X factor, and you still don’t even get to the $10 bn Google was willing to shell out for the company two years ago.
So, what’s going on at Twitter? A lot. Let’s take a look under the hood:
1. Two years ago, it looked like Twitter was going to be in the business of selling data. It was licensing its ‘fire hose’ API like crazy, striking substantial multi-year deals with the likes of Microsoft and Google. And, it was trending to profitability on this model before it invested heavily in service enhancements and headcount in a bid to transform the company into an advertising business.
2. Now, Twitter’s main game is advertising. It sells promoted accounts, promoted tweets and promoted trends. You don’t hear much about the fire hose any more … because Twitter is starting to see some real traction on the advertising product (as you’re about to learn for yourself).
3. To get in on the Twitter advertising action, you have to commit to a whopping $5,000 a month for three months for promoted tweets or promoted accounts (I’ve heard from a reliable source). This is much, much different from the self-service, small-deal Facebook model. For Twitter, you have to commit to big bucks, and you have to sign an insertion order. You have to work through real people at Twitter. Phone calls are necessary. In the long run, it will probably be a smarter move for Twitter than to go the tiny self-service route that Facebook has, but it takes more ramp up.
4. Don’t get seduced by the big numbers, though. You can cut deals with Twitter, which suggests that the company (a) is ambitious (to use these numbers at all), (b) is closing deals at this size and (c) realises that it’s still new and has to have the flexibility to negotiate lower minimum buys.
5. So, what about promoted trends? Well, I’m told that you have to book two months in advance, and it’s first come, first served for a given date. You can get a promoted trend in the US for 24 hours. The cost for this is an astounding $120,000. My source tells me that Twitter is claiming 25 mn impressions served daily in the US, on average, for this product and an engagement rate of 0.3 per cent. The barrier to entry here is definitely the $120,000 minimum spend.
6. The fact that there’s such a long waiting list for promoted trends is definitely promising for Twitter. There’s a lot of revenue just waiting to be recognised. If it can keep this momentum, and generate a lot of repeat clients, Twitter’s future will be rather rosy. At these rates, and assuming only one promoted trend a day, Twitter is set to bring in $43.8 mn next year on promoted trends. The daily exclusivity could be a problem, though. Unless it can push rates up, it will be stuck at around $40 mn in revenue from the product. Running multiple promoted tweets a day would provide the exponential growth opportunity that Twitter desperately needs.
7. But, it’s still a long slog. With its current 1,600 clients doing the minimum monthly buy of $5,000 for promoted tweets or accounts still only adds up to $96 mn. So, the company will definitely need to get its existing clients committed deeply and continue to bring in more. Turning Twitter into a billion-dollar company(in terms of revenue), however, is going to take more than accumulating clients.
In the end, it looks like Twitter is smart to put off a liquidity event for a while. The company still needs to figure out how it’s going to pop. Even at $200 mn or $300 mn in revenue, it has a long way to go before commanding the valuations being bandied about right now. Twitter is still viewed as ‘potential’, but come IPO time, it will have to have transitioned to ‘actual’.
Twitter has a long way to go.
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