Despite some correction in recent weeks, Twitter’s (NYSE:TWTR) stock continues to trade at a steep premium. Our price estimate for the company stands at $26, which is a discount of about 55% to the market. Unlike the market price, our estimate is based on a diluted share count of approximately 666 million for Twitter, which includes restricted stock units and outstanding stock options. There are reasons to be skeptical about the company’s market value as the P/E ratio is negative, the P/Sales per Share multiple in excess of 50x, and the cash flows are still negative. Our current price estimate is based on optimistic assumptions about Twitter’s user base and monetization growth both in the U.S. and international markets. Our baseline expectations imply that Twitter’s global membership base will grow past 600 million over the next eight to nine years, and its monetization in the U.S. and international markets will increase 2.5 times and five-fold respectively. However, the current market price implies much loftier expectations as mentioned below.
Global User Base Grows Past 850 Million (+$15)
To justify Twitter’s current market price, we need to incorporate in our expectations that the company’s user base will grow past 150 million in the U.S. in the next eight to nine years. Additionally, we’ll need to assume that its international user base will exceed 700 million over the same time period. This may be bit of a stretch given the platform’s limited features and competition from other popular social networking sites such as Facebook (NASDAQ:FB). Having 150 million users in the U.S. nine years from now implies coverage of 45% of the U.S. population for a platform that has only one way to share content – Tweets. That’s a little tough to achieve. Besides the competitive threat, the company also faces regulation and ban related risks that are unique to developing countries with unstable political environments and conservative cultures.
Ad Monetization Triples In The U.S. And Increases Eight-Fold Internationally (+$16)
In addition to lofty expectations for user base growth, we need to assume that Twitter will be able to triple its ad revenue per 1000 timeline views in the U.S. and increase the same figure for international markets eight-fold. Is that even plausible? Twitter plans to increase the size of its sales and marketing support teams and extend its self-serve advertising platform to countries other than the U.S. These steps will help the company sell more of its ad inventory over time, and aid growth in its monetization levels in the international segment. However, the emerging markets of Latin America and Asia are likely to have lower revenue per 1,000 timeline views compared to developed markets of Europe. This could negatively impact the figure going forward if most of the growth comes from these markets. Competition from Facebook and other platforms could also diminish the growth in ad pricing, putting further pressure on monetization growth.
As far as the U.S. is concerned, the ad monetization level could hit a ceiling, depending upon the optimal ad density and pricing that Twitter eventually decides upon. Facebook seems to have reached an optimal ad mix and has no plans of increasing it further. The essence is that the ad revenue growth will suffer as the driving factor behind monetization growth solely becomes the increase in the ad pricing instead of ad density
Our price estimate for Twitter stands at $26, implying a discount of about 55% to the market price.