ROI (Return on Investment) is how much sales, profits or shareholder value is realized from money invested.
Many consider it the final word because it’s the measurement that proves if growth is sustainable and how well a company is being managed.
Twitter filed its IPO. It’s now valued at $12.8 billion but has never made a profit.
In fact, the filing shows Twitter has lost money every year, with current losses at $419 million.
How is it a company can continues to lose money, to the tune $419 million, yet be worth $12.8 billion?
I help companies with ROI, teach Measurement and ROI at Rutgers CMD and in Strategic Digital Marketing, a new book from McGraw-Hill, authored the ROI chapter.
Here’s what to consider for the ROI of the Twitter IPO.
WHAT ARE TWITTER’S GAINS?
- REVENUES OF $583 MILLION: This year, Twitter is expected to have revenue of almost $600.
In 2014, it is estimated at $950 million.
Sales are increasing +63% versus year ago.
- USERS ARE AT $218 MILLION: Twitter boasts 218 million monthly active users, but at 1/10 of Facebook users, for some advertisers, it isn’t a big enough.
- TWITTER IS PERFECTLY ALIGNED WITH MOBILE GROWTH: Next year, more people are expected to access the internet from mobile devices than desktops.
More than 75% of Twitter users accessed the site from their mobile phone this year. More than 65% of Twitter’s ad revenue is already mobile.
- TWITTER IS A UTILITY: In every ROI calculation, there is a benefit that goes beyond the numbers to create faith in success.
In this case, it is that Twitter is a utility. Twitter is surprisingly useful tool for solving problems, connecting with others that might not be possible otherwise and providing insights.
Twitter says its mission is to: “Give everyone the power to create and share ideas and information instantly without barriers–a free and global conversation.”
WHERE DOES THE REVENUE COMES FROM? WHAT IS THE PROGNOSIS FOR GROWTH?
- TWITTER REVENUE IS LARGELY IN A VARIETY OF AD PRODUCTS: About 85% of Twitter’s revenue comes from advertising.
There are three main ways to advertise on Twitter: 1) By promoting a tweet that appears in people’s timelines, 2) promoting a whole account, or 3) promoting a trend. Data licensing is another revenue stream.
Known as “firehose,” Twitter sells its public data, of about 500 million tweets each day.
- ADS ARE NOT DISRUPTIVE: Anything that disrupts the user experience, especially on a social network might reduce user engagement. One of the advantages of Twitter for marketers over traditional display advertising is they have worked really hard to make sure that advertising on Twitter does not interrupt.
- AD PRICING IS BASED ON RESULTS.
A budget is usually set at the start of the Twitter campaign. It also has a “bidding” system in which advertisers compete with each other to have their content appear like other pay per click ads. But, in Twitter case, the per per click is a pay per retweet.
Twitter tends to charge its advertisers according to the amount of interaction their content generates.
- AD REVENUE IS MOSTLY U.S. BASED. Only 17% of ad revenue is outside the US. While you could look at this as the glass half full or half empty, Twitter has to do better in increasing global ad revenue.
IS WALL STREET’S IPO VALUATION ACCURATE?
- VALUATION IS CONSERVATIVE VERSUS OTHER INTERNET IPO’s: When Google announced its IPO, the company was valued at $28 billion (around $35 billion in today’s dollars).
Facebook had an IPO valuation of $104 billion.
- IPO PRICE-TO-SALES RATIO IS HIGH: While Twitter’s offering is more conservative, the valuation is 28.6 times the company’s revenue over the last 12 months.
Facebook’s $104 billion is only about 26 times the company’s revenue.
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Meanwhile, LinkedIn priced its IPO at 14.5 times its revenue. At current valuation, Twitter is overpriced.
- WHAT CAN WE LEARN FROM OTHER SOCIAL IPO’S – FACEBOOK AND LINKEDIN: Early demand for Facebook did not materialize, The result was that Facebook shares failed to find a sustainable bid.
Meanwhile, LinkedIn priced its offering at $4.3 billion, but the shares more than doubled on their first trading day. That 109% initial price pop gave LinkedIn a valuation of $8.9 billion.
Twitter is going to do well and it’s a good time for taking the company public. But don’t expect ROI right away.
Twitter isn’t likely to generate a positive ROI for a couple of years, but it will.
Wall Street’s valuation could also be better balance with the realities of how companies make money.
Does this help show how a company with no profits can me worth so much? Now, you know my opinion, what’s yours on the ROI of the Twitter IPO?