In light of Twitter’s upcoming IPO, slated for Thursday, BIA/Kelsey has developed its own projections of the social network’s future financial performance to arrive at what we believe is a reasonable stock price and achievable fair market valuation. We’ve also analyzed the micro-blogging service’s traffic and revenue trends and highlighted key strategic growth levers for it to pursue.
Our conclusion: While some in the popular press consider a $17-$20 stock price range to be modest, and others in the investment community may deem it disappointing, we believe that between $17 and $18 per common share represents reasonable pricing based on the current financial health of the business and the growth necessary to support this price.
The discounted cash flow analysis that we employed suggests that for Twitter to live up to a $17 share price and $13.2 billion fair market valuation, the company must grow aggressively, and far more efficiently. This translates into revenues eclipsing $1 billion in 2014, with EBITDA turning positive for the first time next year as well. By 2020, revenue must surpass $5 billion, with EBITDA approaching $3 billion, a margin of 57 percent.
So, how does Twitter get there? Strategically, the path is littered with challenges, but also lined with opportunities.
First, the promising signs. While most media and technology companies struggle to solve the mobile advertising puzzle, Twitter already generates 70 percent of its ad revenues from mobile platforms. Overall ad revenue grew by triple digits over the past year, and ARPU is on the rise.
But the news isn’t all rosy. U.S. users appear to be plateauing. Internationally, Twitter has not demonstrated a strong ability to monetize its global base, which constitutes nearly 80 percent of all users.
Strategically, what can – and should – Twitter do to achieve a $13.2 billion fair market valuation? BIA/Kelsey sees four key business opportunity areas: 1) Scale the advertising business via technology; 2) Expand the SMB channel (largely through partnerships); 3) Leverage early Social TV leadership to capture TV ad spend; 4) Diversify revenue streams (primarily the Data Licensing unit). These are key drivers of revenue and EBITDA that would position Twitter to grow at the pace and scale necessary to support the share price and fair market valuation that we currently deem appropriate.
BIA/Kelsey clients can access the full report here.