- July 29, 2022
- Posted by: Ramkumar
- Category: Posts
My Valuation Of Twitter
I have followed Twitter since its S-1 filing in 2013 and have valued the company yearly.
𝐓𝐰𝐢𝐭𝐭𝐞𝐫 𝐚𝐭 𝐈𝐏𝐎
Twitter sales at IPO were $448 million, and in 8 years, its revenues have grown by a 𝟑𝟓% 𝐂𝐀𝐆𝐑 to $5.1 billion. The accounting statements make little sense to value a company like Twitter as its reinvestments are mostly R&D expenses. Thus, i capitalised on the R&D expenses with four years amortisation period to gain an accurate picture of its EBIT and ROIC. Twitter has no voting shares. The convertible preferred shares got converted to common shares at the time of IPO. At the time of IPO, i valued Twitter at $20/share, assuming that the online advertising pie advertising would expand. With its impeccable platform, Twitter will gain share from Meta and Google.
Fast forward to 2021, 𝐓𝐰𝐢𝐭𝐭𝐞𝐫 𝐟𝐚𝐢𝐥𝐞𝐝 𝐭𝐨 𝐠𝐫𝐨𝐰 𝐭𝐨 𝐢𝐭𝐬 𝐩𝐨𝐭𝐞𝐧𝐭𝐢𝐚𝐥 with Meta, Google, and LinkedIn having a monopoly in online advertising, evident by the Revenue/user of Twitter at $15 against $41 for Meta and $39 for Linkedin. Twitter’s users at 217 million in 2013 increased to 330 million in 2021 at a 5.5% CAGR.
In my valuation, i assume that Twitter will grow by 25% in the next five years. Its sales/Invested capital will improve due to considerable past investments and maintain its EBIT. Moreover, as the firm gets profitable, its effective tax rate of 1.6% converges towards a marginal tax rate of 27%. Therefore, I value Twitter at $𝟒𝟑.𝟐𝟔/𝐬𝐡𝐚𝐫𝐞.
𝐌𝐮𝐬𝐤’𝐬 𝐛𝐢𝐝 𝐟𝐨𝐫 𝐓𝐰𝐢𝐭𝐭𝐞𝐫
Musk already has 9% shares and has to raise $36 billion to buy the 91% stake. Musk can pledge his Tesla shares worth $170 billion to fund this deal, but Musk has already pledged his shares earlier; the maximum loan he can raise is $21 billion. Next, Musk can raise the remaining debt against Twitter, but the firm has a junk rating increasing its cost of debt. The final option is for Musk to partner with a PE firm to raise capital. In my view, the last option is more straightforward as PE firms have loads of money.
Twitter’s 𝐩𝐨𝐢𝐬𝐨𝐧 𝐩𝐢𝐥𝐥 𝐝𝐞𝐟𝐞𝐧𝐬𝐞
Twitter management has adopted the poison pill and shareholder rights plan to dilute Twitter equity, making it hard for Musk to buy these diluted shares at a premium. Thus, the final purchase price may cross $43 billion and reach ~$60 billion.
1)Twitter has underperformed and needs to go private to transform itself if it has to be a serious contender against Linkedin and Meta. Thus, its shareholders 𝐡𝐚𝐯𝐞 𝐭𝐨 𝐯𝐨𝐭𝐞 for this hostile bid offer.
2)Musk is not the right owner as he is a 𝐦𝐞𝐠𝐚𝐥𝐨𝐦𝐚𝐧𝐢𝐚𝐜 and his attention span is limited (remember hyperloop and his idea to take Tesla private). 𝐀 𝐏𝐄 𝐟𝐢𝐫𝐦 𝐢𝐬 𝐚 𝐛𝐞𝐭𝐭𝐞𝐫 𝐨𝐰𝐧𝐞𝐫.