Well, Twittermania has taken full hold in Silicon Valley. Maybe it has something to do with the fact that
Techmeme, a news aggregation site frequented by technology trade journalists, VCs, and PR people, now
dedicates nearly half its front page to Twitter news, including putting direct links to the Twitter company blog above the fold.
For example, here are the links today just from Techmeme:
Okay, I feel a bit nauseous. The direct links to the Twitter blog put me over the top.
What is it about Twitter? Is it the new Google? The next Microsoft? What's all the attention? It's fascinating because so many smart people I talk to say they still "don't get" Twitter. After all, it's not like Twitter has invented cold fusion. It's about people sending short text messages back and forth.
One very smart person I spoke to a few weeks back -- a guy that made a fortune as a SVP in a prominent tech IPO, worked a partner in a VC firm, and now works as a VP a private communications company -- says he just doesn't get Twitter. "I wish I could understand it," he says. "It just seems like email to me."
I run into other smart skeptics all the time (you won't find them on TechMeme). Boy, I missed Twitter, they say. I still don't get it. It's okay, don't feel bad: It is hard to imagine a company that periodically flashes a
"Fail Whale" being the next global conglomerate.
Indeed, it's hard to match the quantity of hype in the frothing blogger pits over Twitter with its business potential. Here's the way I think of it: If Twitter were to IPO, would I buy the stock?
I may actually have to, just as insurance in case the thing goes Google. Twitter allegedly
has a $1B valuation. Let's say, to get the company public and allow the VCs to cash in, they find a way to go public at a $2B valuation. I'd say, in order to justify that valuation, they probaby need about $500M in revenue and some indication that they are close to profitability. If in 2011 Twitter can make $100M in profit, if you give that a P/E multiple of 20, that's a $2B valuation. Seems doable, to me.
How close is it to these kind of numbers? According to
documents published on TechCrunch, Twitter was forecasting something along the lines of $120M in revenue in 2010. However, those numbers are more than six months old. That's about 3 years in Twitter Time.
I'd estimate that their forecast has probably grown much more bullish, because the company's user base is growing faster than expected. ComScore said the site had 22.3 million unique visitors in March in the United States, up roughly 140 percent year-over-year. Since then, Twitter has also
cut a deal with Yahoo and launched
its new promoted Tweets program.
So what could the revenue be? My guess is that Twitter will do between $200-$300 million in revenue this year. That is a combination of 1)
It's new ad program 2) S
elling data and traffic to other sites and other creative business models.
This kind of revenue can easily grow in 2011, especially given the marketing excitement around social networks (justified or not). Let's say $250-$500 million is probably sufficient to make Twitter profitable and even a potential IPO candidate in 2011. So I've just detailed how Twitter gets to the numbers we outlined above that could give it a $2B valuation.
Okay, great. So we've now largely justified how the private investors will make money over Twitter's venture valuation of $1B. The rich get richer. You didn't get into Twitter on the ground floor, though. What about us poor proletariats who get sucked into buying the IPO? Is there more? Would you buy the stock at the IPO with a $2B valuation?
Judging from the amount of press and blogger hype on Twitter, you would think it was the next Microsoft or Google. These companies both have large, monopolistic franchises (Google in text ads and search, Microsft in operating systems and business apps). These companies have valuations in excess of $100B dollars. The hypemeter currently projects Twitter to be the next Google.
To achieve "Google-ness," Twitter would have to become the franchise in social networks marketing. Here's the problem I have with that: MySpace. And Facebook. See how fast Facebook displaced MySpace. Now Twitter is trying to overtake Facebook. Social Networks are extremely delicate operations in momentum. If you stumble a bit or make a wrong move, you are toast. Rupert Murdoch learned this painful lesson when he tried to integrate MySpace into
News Corp. after a $600M acquistion.
This says one thing: I think getting to a $1B or $2B valuation for
Facebook and Twitter is a slam dunk. Getting to a $100B is a different story. They are going to have to morph their rapidly expanding fanbase into the go-to social networking marketing channel, before something new comes along and beats them. And their execution needs to be flawless.
