I gave a presentation the other day for venture firm Insight Partners in which I addressed the question of whether we were having another tech bubble.
My answer was “no,” but I noted that there were plenty of other things people should worry about (such as the sad state of the United States).
You can check out the presentation here.
In any event…
In the presentation, I reviewed the valuation multiples of several hot tech companies–the ones folks usually point to when citing evidence that there’s a new tech bubble. These companies included Facebook, Zynga, Groupon, and Twitter.
The valuation of most of these companies is actually reasonable on a revenue and earnings basis, at least as far as I can tell. Of the four, Twitter’s valuation seems by far the most speculative, especially since the company has yet to build a major business model.
Specifically, at a private-market valuation of around $7 billion on what I estimated at $250 million of 2011 revenue, Twitter is trading at about 30-times this year’s revenue. That valuation is fairly described as “aggressive.”
As soon as I published the presentation, however, someone closer to the company pinged me to say that Twitter’s revenue this year will be closer to $100 million than $250 million.
And that led me to check with someone who is actually privvy to Twitter’s financials. This person estimated that Twitter’s revenue for 2011 will likely be in the $140 million range — $100 million of ad revenue and another $40 million or so of data revenue.
The person did add that Twitter is hitting its growth targets for this year, which is good news.But $140 million of revenue is a ways from $250 million of revenue, especially when one’s valuation is $7 billion.
Specifically, it’s a multiple of 50-times revenue.
Now, Twitter is still growing very fast, especially when measured by number of sign-ups. (The number of active users appears to be far smaller). And Twitter is just at the beginning of developing a real revenue model. And it’s possible that, when Twitter really stomps on the revenue gas, its revenue will quickly jump to, say, $500 million, which would make a $7 billion valuation more reasonable.
On the other hand, it’s also possible that Twitter will never find a great business model, in which case its revenue will just muddle along. (And, in which case, its valuation is seriously overstretched).
In any event, I asked a Twitter investor what the Twitter investor thought of Twitter’s current private-market valuation.
The Twitter investor didn’t pull any punches.
“It’s ridiculous,” the Twitter investor said.