In our opinion, Twitter (TWTR) has only just begun to turn on its monetization engine for more than 230 million monthly active users, or MAUs. Although arguably the company has not yet penetrated the mass market, we believe it will succeed in simplifying its applications, improving accessibility for users, and delivering a more pervasive Twitter experience.
In our initial report, we highlighted the company's narrow economic moat and trends that may ultimately support a wide moat rating. With a growing ecosystem of content partners, media, celebrities, and engaged users, we expect the company to expand its user base and its monetization capabilities through new ad products. User growth will help expand the company's reach, and we believe will provide the critical mass necessary to capture new advertising budgets that depend on reaching a minimum number of users. Furthermore, engaged users will be locked into the differentiated content platform, strengthening the network effects and increasing advertising spending.
Key Points
Our fair value estimate ($26 per share) is 40% above the $18.50 midpoint of Twitter's initial pricing range. We believe the opportunity for capital gains is greater than the probability of capital loss, and have used a weighted average of three different scenarios in calculating our fair value estimate.
The fair value estimate in our bull case is $50, representing 170% upside to the initial pricing range. For investors who believe Twitter will become ubiquitous like Facebook (FB), the investment case is unusually strong.
Our bear-case valuation of $15 assumes that Twitter can easily throttle down investments to serve the current users and advertisers, protecting its narrow moat and generating cash flows; and Twitter's unique communities and media platform are extremely difficult to replicate, and acquisitors such as Facebook and Google (GOOG) would value the company at a minimum of $15 per share.
At the current pricing range ($17-$20), investors who are seeking growth and are willing to withstand the likely volatility in business results and stock price should consider an investment. Still, we recommend investors be disciplined and purchase at a discount to our fair value estimate.
TRANSACTION SNAPSHOT: Twitter plans to list on the NYSE under the symbol TWTR with pricing likely to occur as early as Nov. 6. The total offering consists of 70 million common shares at a proposed range of $17-$20, implying a pro forma market capitalization of up to $13.7 billion. For purposes of calculating a fully diluted share count, we have included 14.8 million shares issued for the acquisition of MoPub.
Twitter's Exponential Growth Opportunity
We believe the most important growth levers are growth in market share, users, and time spent. Perhaps the most important aspect supporting our positive view on growth is the complementary nature of Twitter to traditional content and media. For example, the company recently agreed to a commercial deal with the National Football League to distribute proprietary content (short replays) to Twitter users. This complementary stance will allow Twitter to acquire content that flows through its media platform more cheaply.
Our Fair Value Estimate for Twitter Is $26 Per Share
We believe Twitter's narrow moat should allow the company to hold on to its users, widen its content partnerships, and increase its ad revenue per user. Ultimately, we believe there is a strong investment case for Twitter, although we believe the company has several hurdles that investors would be wise to consider, and our confidence in the bull case is not sufficient for us to consider this a likely scenario. However, given the opportunity for material upside to our base case, we have opted to use a probability-based weighted average approach for valuation, which yields a fair value estimate 30% higher than our standalone base-case DCF model. Investors should be aware that we are not projecting GAAP profitability or positive free cash flow until 2016. If the company achieves profitability a year earlier, that is unlikely to have a meaningful impact on our valuation.
