Yet the company has a market cap of around $20 billion. That’s a pretty big multiple of valuation to sales, let alone underlying profit.
Why is it valued so high?
Answer: because of speculation of a purchase.
In addition to Alphabet/Google and Salesforce, both of whom it is said have already held preliminary discussions with Twitter, Verizon and AT&T are all thought to be potential suitors. As well, of course, as the usual suspects, Apple and Facebook.
No one seems to have been able to come up with a compelling reason for Salesforce’s interest – other than some vague stuff about how they are both pretty good at handling complaints from a company’s customers. Some have suggested that the rationale behind the interest from Salesforce is that its boss, Marc Benioff is an avid Twitter user
Google already has its own version of Twitter: Google Plus, which in terms of popularity is a bit like to Twitter what Flash Gordon is to Star Wars.
In the case of Verizon or AT&T, the key rationale would be that both want to start generating more ad revenue, and a purchase of Twitter would give them some clout. There is a question mark over whether Facebook would really want to buy the company that for so long has been its big rival; as for Apple – making money from ad revenue is not normally its thing, Apple does make a lot more from apps, however.
So why the real reason for a possible bid?
Bear in mind that Twitter’s EBITDA of $175 million is quite impressive. Its losses versus EBITDA are accounted for by stock-based compensation expense (share options for staff related costs) depreciation and amortization and interest and other expenses. The biggest is the first of these categories.
The market cap of $20 billion, it not that exorbitantly greater than underlying profits – a ratio of around 30.
If the purchaser can cut Twitter’s costs by creating synergy, then profits would shoot-up.
But this is really about big data, Twitter generates a lot, and in combination with other data could ultimately become very valuable indeed.
But here is just one thought for you.
For some of us, Twitter is great. To justify its stock market valuation, it has had to focus on growth. But explaining what makes Twitter so popular is hard to do. These days its boss is also its founder, Jack Dorsey, who returned to the helm last year – but Mr Dorsey is also the CEO of debit and credit card payments company Square, and few people seem to think that one man can do both these jobs. Maybe Twitter’s problem is that it was overhyped at IPO, that what it really needs is tending loving care, rather than radical ideas for generating more growth or becoming part of another company, with its own ideas and ambitions which may in the long run be quite different from what Twitter users would like to see.