When Aswath Damodaran values a company, he cuts through the clutter and Twitter Inc (NYSE:TWTR) is no different. In his latest blog post, he offers his reactions to the latest earnings report from some of the big tech companies, which includes Twitter Inc (NYSE:TWTR). Ever since the company came out with its IPO, Damodran has been skeptical about it and he continues to do so.
When Twitter Inc (NYSE:TWTR) came with its IPO, the narrative that Damodran had offered of the company was that it would ‘ become a significant but not a dominant player in the online advertising business’. Which was backed by his argument that businesses would be reluctant to make Twitter Inc (NYSE:TWTR) as their primary advertising platform, due to its 140 character limit on messages. He had then valued Twitter Inc (NYSE:TWTR)’s shares at $18, which was significantly lower than its offering price of $26.
Damodaran now argues that the Street is focussing more on Twitter Inc (NYSE:TWTR)’s user base growth, instead of focussing on the financial numbers reported by the company, when deciphering its earnings report. He cites the movement in Twitter Inc (NYSE:TWTR)’s stock price, when the company announced its last three earnings reports as a testament to that. He also feels that the company hasn’t evolved significantly since its IPO.
“Looking at both the accounting and user numbers, what is striking about Twitter is how little the company has changed over the period that it has been in the market. The proportion of revenues it receives from advertising has remained around 90%, its revenues from international sales have increased only marginally and its mobile advertising has stayed at a high percentage of revenues (which is not surprising given that its compact format travels well to mobile devices). Its use of invested capital has not become more efficient […],” Damodaran wrote.
He also dismisses the user numbers reported by Twitter Inc (NYSE:TWTR), saying the company would have added to its user base (although not intentionally) by counting individuals who are exposed to tweets in news feed but aren’t conventional users of the site. Another thing that Damodaran shrugs off is ‘the claim that the company actually made money, if you do not count stock-based compensation as an expense’. He then provides his latest valuation of Twitter Inc (NYSE:TWTR)’s stock at $22.53 per share, which according to him also includes a much more efficient use of capital by the company in the future.
“It is still early in Twitter’s corporate life and like Facebook, and I did see this news story about Twitter perhaps entering the online retailing world, and while it may be just as much a sign of desperation as hope, it is true that young company narratives can change quickly,” Damodaran concluded.