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This week, Twitter made its offering documents public, giving us the first real glimpse into the company's revenues and user base. Since users are often mentioned as a significant number in evaluating a company, I've looked in the past at how they compared to revenue and market valuation. So with Twitter's public revenue and user base numbers, along with the valuation of $15-20 billion that has been floated as its upcoming market capitalization, we can start drawing some parallels to some of its publicly traded competitors in the social network space:
What we find is that while the company has a higher number of users than LinkedIn (and a lower one than Facebook), it does not do as good a job as its competitors did at IPO time of turning them into money.
Average Revenue Per User
In businesses where most of the revenue is derived from being able to sell something related to a user, it is not uncommon to calculate Average Revenue Per User (ARPU). Today, companies in the wireless, entertainment, and digital businesses look at those values as an indicator of how much a user is currently worth to a business. Breaking things down to that level allows for an apples to apples comparison without having to worry about one company having more users than another. According to filings, the values for Facebook, LinkedIn, and Twitter looked as follows:
Twitter's relative lack of success at turning users into dollars may have to do with Twitter's ad business still being relatively new or it could be that it is still figuring out how to improve its own efficiency. Twitter is making 39 cents for every dollar Facebook gets out a user and 30 cents compared to a similar dollar LinkedIn would get. This could either mean room for substantial growth or represent a warning sign about the company's ability to run a solid business.
To get a sense of the difference, if Twitter had the same numbers of users as Facebook (and assuming its ARPU didn't grow), it would have made $1.7 billion (compared to the $4.3 billion Facebook made).
One may point out that Facebook and LinkedIn are more mature businesses. So let's look at how they were doing, relatively, when they went public:
What's interesting here is that Facebook looked like it was doing substantially better on all fronts (revenue, users, ARPUs) but Twitter actually comes in much closer to where LinkedIn was at in terms of ARPUs (still trailing it by 20%), which may point to the potential for explosive growth down the line. Another interesting sidenote here is that Facebook may be growing its user base but its revenue base is no longer growing at the same speed.
Average Valuation Per User
Since there is a lot of focus on user numbers, one can assume that the number of users may give us a sense of how investors value a company. So I'd like to advance the concept of Average Valuation Per User (AVPU), which takes the market capitalization of a company and divides it by the number of users. This can provide a useful lens to compare user population to the valuation of a company:
Current market assumptions are that Twitter will be priced at $15 billion to $20 billion at its offering, which would mean each user is priced at between $69 and $92 a piece. When compared to the current value of a user at other companies (Facebook: $108; LinkedIn: $136), this does not seem terribly out of line. And when compared to the AVPU those companies had at IPO time ($123 for Facebook and $100 for Twitter), it seems reasonable to expect that Twitter would end up closing north of the $20 billion valuation that has been floated about as the high end of the price range.
Conclusion
While Twitter's revenue and user base appear smaller that its competitors, its IPO offering seems to point to a business that is roughly the same size as LinkedIn's business at the time of IPO. The currently valuation range of $15-20 billion that has been floated about seems to be in line with what one might expect from a social media business of that size in revenue and user base and points to substantial opportunities for growth down the line. Once public the company will have to work hard on increasing both number of users and average revenue per user if it wants to be considered as a successful public company.
Methodology: To calculate the values, I've taken the user and revenue numbers provided by each company in their 2012 filings. In terms of valuation, I've taken the valuation given to Facebook and LinkedIn at the close of market on Friday and for their first day of public close on the stock market; For Twitter, I took the bottom and top of the $15-20 range rumored in many reports about the offering. I then divided those market caps and revenue numbers by the number of users to get at calculated values.
