This post was inspired by a comment on Marissa Campise's blog as it is my crude attempt at a valuation of Twitter given her projections of the revenue potential upon reaching full scale. Unfortunately, it delayed (and shortened) my previous post on Google+ (expect comments on design flaws next week...need time to use the merchandise) but hopefully it will result in two posts this week. Also, it could have been completed on Saturday but I haven't been able to find a reliable spreadsheet app which will allow editing formulas (any suggestions would be greatly appreciated) so I had to wait until boarding a NYC bound train in Rutland, VT before booting-up my pre-college D610 laptop. Therefore this is almost my first entirely mobile blog entry as I used the Blogger and Google Docs apps on my Droid X (full disclosure: I'm a big Google fan if I ever write a Microsoft or Apple blog) for most of the work. W/O further ado here is a link to my model and below is my assumptions/comments:
***Link to come as soon as I can get my computer on WIFI. Google docs app failed me again.
Here is the link: http://bre.ad/04qao8
The logical way to explain my assumptions would be to work from the top of the spreadsheet down.
The discount rate for the NPV analysis is 13.5% which was the 2010 average return for VC firms according to Cambridge Associates. This seems like a fair starting point but many VCs would probably argue that it is too low given a minimum expected return of 20% for most firms and this/next years potential blockbuster averages given the influx in IPOs. A better DR would be an average of returns over the past 5 years and an estimate for 2011 or the WACC for VC firms but those methods would take more research than I can complete on this phone.
The private market valuations were based on reports from the WSJ and are for comparison.
Revenue Growth percentages were calculated to achieve a Gross Revenue of $228M by 2013 when Twitter could potentially reach full scale as outlined in Marissa Campise's post. 2013 was my choice for the potential milestone as their estimated 2011 gross revenue is expected to reach $150M and 20% (2012) followed by 27% (2013) annual growth rates are conservative for a growing tech firm. The 10% growth rates for 2014 and beyond are for calculating the terminal value of the company for an expected IPO in 2013 when the VCs would theoretically liquidate their positions. This percentage is completely arbitrary and could be replaced with historical data for comparable companies such as Google, Apple, etc (again need a computer).
Expected revenue figures through 2011 are from Techcrunch and the WSJ. 2012 and beyond are based on the growth rates from the previous row.
EBIT will probably be the most controversial assumption in this model because I simply used the data from reports of Zynga's S-1 (still need to read that thing...) and applied it to my Twitter numbers. An EBIT margin of 15% for Twitter could be rich given that they are still raising private capital today. In theory it should also improve over time but I decided to keep it constant to avoid moving parts.
The terminal value is used to calculate the present value of Twitter's income for estimating the value of the company when it IPOs. This formula relies on an IPO in 2013 as stated previously and is influenced by the 10% annual growth rate.
The NPV of the income from 2011 to the terminal value in 2013 is fairly straight forward.
The Price to Earnings ratio is arbitrary but is necessary for assigning value to the projected earnings and calculating the theoretical market cap or Projected Market Valuation. A P/E of 18 is extremely low for a growing tech company but I like to keep things conservative. According to Bloomberg some comparables as of 7/8 are: GOOG - 20.6, LNKD - 1422, AAPL - 17.15. I would have preferred using P and AWAY as comparables but they were absent for the same reason LNKD is so high...No income.
The projected market valuation is simply the P/E times the current value of the earnings.
The MV/Revenue is the multiple for value relative to revenue and is used to compare companies that don't have earnings. A MV/R multiple of 24.6 is relatively low compared to that of LNKD - 38.7 at Fridays closing price of $99.6 and 2010 revenues of $243M.
Results - My assumptions result in a valuation of $3.6B which is in line with the December 2010 funding round listed in the spreadsheet. Raising the P/E ratio to 34 would result in a $7B valuation while a MV/R multiple of 38.7 (LNKD) would result in a valuation of $5.8B. On a comparables basis this valuation seems fair especially given the state of the market. I highly doubt this bull (bubble) IPO market will last until 2013 and Twitter will more than likely hit the market by this time next year depending on the success of Facebook's IPO.
I look forward to some comments on my methods/modeling and will be shamelessly plugging this post everywhere.
***Link to come as soon as I can get my computer on WIFI. Google docs app failed me again.
Here is the link: http://bre.ad/04qao8
The logical way to explain my assumptions would be to work from the top of the spreadsheet down.
The discount rate for the NPV analysis is 13.5% which was the 2010 average return for VC firms according to Cambridge Associates. This seems like a fair starting point but many VCs would probably argue that it is too low given a minimum expected return of 20% for most firms and this/next years potential blockbuster averages given the influx in IPOs. A better DR would be an average of returns over the past 5 years and an estimate for 2011 or the WACC for VC firms but those methods would take more research than I can complete on this phone.
The private market valuations were based on reports from the WSJ and are for comparison.
Revenue Growth percentages were calculated to achieve a Gross Revenue of $228M by 2013 when Twitter could potentially reach full scale as outlined in Marissa Campise's post. 2013 was my choice for the potential milestone as their estimated 2011 gross revenue is expected to reach $150M and 20% (2012) followed by 27% (2013) annual growth rates are conservative for a growing tech firm. The 10% growth rates for 2014 and beyond are for calculating the terminal value of the company for an expected IPO in 2013 when the VCs would theoretically liquidate their positions. This percentage is completely arbitrary and could be replaced with historical data for comparable companies such as Google, Apple, etc (again need a computer).
Expected revenue figures through 2011 are from Techcrunch and the WSJ. 2012 and beyond are based on the growth rates from the previous row.
EBIT will probably be the most controversial assumption in this model because I simply used the data from reports of Zynga's S-1 (still need to read that thing...) and applied it to my Twitter numbers. An EBIT margin of 15% for Twitter could be rich given that they are still raising private capital today. In theory it should also improve over time but I decided to keep it constant to avoid moving parts.
The terminal value is used to calculate the present value of Twitter's income for estimating the value of the company when it IPOs. This formula relies on an IPO in 2013 as stated previously and is influenced by the 10% annual growth rate.
The NPV of the income from 2011 to the terminal value in 2013 is fairly straight forward.
The Price to Earnings ratio is arbitrary but is necessary for assigning value to the projected earnings and calculating the theoretical market cap or Projected Market Valuation. A P/E of 18 is extremely low for a growing tech company but I like to keep things conservative. According to Bloomberg some comparables as of 7/8 are: GOOG - 20.6, LNKD - 1422, AAPL - 17.15. I would have preferred using P and AWAY as comparables but they were absent for the same reason LNKD is so high...No income.
The projected market valuation is simply the P/E times the current value of the earnings.
The MV/Revenue is the multiple for value relative to revenue and is used to compare companies that don't have earnings. A MV/R multiple of 24.6 is relatively low compared to that of LNKD - 38.7 at Fridays closing price of $99.6 and 2010 revenues of $243M.
Results - My assumptions result in a valuation of $3.6B which is in line with the December 2010 funding round listed in the spreadsheet. Raising the P/E ratio to 34 would result in a $7B valuation while a MV/R multiple of 38.7 (LNKD) would result in a valuation of $5.8B. On a comparables basis this valuation seems fair especially given the state of the market. I highly doubt this bull (bubble) IPO market will last until 2013 and Twitter will more than likely hit the market by this time next year depending on the success of Facebook's IPO.
I look forward to some comments on my methods/modeling and will be shamelessly plugging this post everywhere.
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