An IPO Roadmap for Twitter
by R. Raynovich April 16, 2010

What is it about Twitter? Is it the new Google (GOOG)? The next Microsoft (MSFT)? When's the IPO? Will you buy it?

This is a fascinating discussion 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. Yes, it's strange that a company that has tapped into the world's largest barroom conversation is now one of the hottest companies on earth.

Indeed, it’s hard to match the quantity of hype in the frothing blogger pits over Twitter, with its business potential. It's more fun to analyze it. How big can Twitter be? 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 the way of Google (GOOG). Twitter allegedly has a $1B valuation. I'd estimate to take the company public and allow the VCs to cash in, they need 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. To me, it seems doable.

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, since 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 YOY. Since then, Twitter has also cut a deal with Yahoo (YHOO) 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) Selling 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. I think it's entirely conceivable that the company makes $50M-$100M in profit in a year or two. 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, Microsoft 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. 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.

So the short answer is I would buy the stock, but only a little bit, at a $2B valuation. And then I would watch how the company and business develop.

Gettting to a $1B or $2B valuation for Facebook and Twitter at this point is relatively easy. 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.

About the author: R. Scott Raynovich
R. Scott Raynovich is an internationally recognized expert in technology, telecom, and investment markets. He has been quoted in publications including Reuters, Dow Jones, Barron's, and the San Jose Mercury News. He has also been interviewed on CNN and National Public Radio.

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