Last night, a lot of folks I know were sitting up late digging through Twitter's S1 filing with the SEC, looking for some clue as to what the company is worth. The Twitterverse and larger online world were full of commentary and questions about the business model and prospects of this popular social-media company.
I watched baseball, read a book and enjoyed a nice win.
I already know what Twitter is going to be worth when it starts trading. It will be valued at "too much." It will be an immediate market favorite, and the stock will make it to the ticker set of every short-term trader and wannabe hedge-fund legend. People will be begging their brokers for shares at the initial public offering, and everybody and their brother will jump on the stock in the aftermarket. Like so many hot stocks, it will be priced as a betting slip in a popularity contest, and not as an investment in an ongoing business concern.
I have no intention of ever cracking the cover of the prospectus. But a search around the Web shows that, for the six months ended June 30, the company did about $250 million in revenue. It lost around $70 million during the first half of the year.
The IPO is coming about with the company valued in the very nice neighborhood of $10 billion to $12 billion, according to some of the media comments this morning. That's a price-to-sales ratio of more than 20x if you annualize the six-month results. Even if we allow for the fact that the company is growing very quickly, the implied valuation is something more than 10x revenue. That's revenue, and not earnings, as the firm has no earnings yet, and no projection as to when the bottom line will turn black.
I use Twitter. I also use Facebook (FB) and LinkedIn (LNKD). But the stocks of these social-media favorites remind me very much of what we saw in 1999, such as in Cisco (CSCO) and some of the other tech names. They are pretty cool companies, but they do not, and probably cannot, produce enough revenue and profit to justify the price their shares fetch in the marketplace. Facebook trades for 20x revenue and 175x earnings. LinkedIn fetches 21x sales and a cool 700x bottom-line profit right now. These are simply not realistic business valuations.
What I find somewhat amusing, and also investable at current prices, is that all of these sites tout mobility as a huge part of their business success. What helps these companies gain users and sell advertisements is the ability of users to Tweet and post on the fly via smartphones and tablets. Yet, when we look at the companies making the pieces that go into these devices that are so critical to social media's success, we see that their shares sell for far less enthusiastic prices.
Gorilla Glass has become the glass of choice for many smartphones, but the company that manufactures it, Corning (GLW), is trading at far more attractive prices than those of the social-media names. Corning trades right around book value and at about 10x earnings. The price-to-sales ratio is a much more reasonable 2.6x. The shares trade at a healthy discount from my $20.50 calculation of intrinsic value, and the company pays a dividend of almost 3%.
I would prefer to buy Corning shares at a bigger discount to book value, but a long-term buyer could buy the stock right now and enjoy solid long-term profits from growth in its business over the next decade and an expansion of the earnings and asset multiples. You are buying a business at a good price, not making a bet on popularity.
The same can be said for a lot of other companies making products that help provide a platform for social media. One of our long-shot stocks from earlier this week, Amkor Technologies (AMKR), sells test services and packaging -- to companies that make the semiconductor chips that go into consumer electronic products like phones and tablets. The stock is very reasonably priced, trading at less than book value and at 10x earnings. You can buy the business for $0.25 on the dollar of sales, which strikes me as much more reasonable than 20x sales volume.
Yes, in the short-to-intermediate term, the stock market is very much a popularity contest. But if you have been around a few decades, you have seen the popularity of various companies fade quickly, and with devastating results for shareholders. You have also seen that very few people ever leave the party early enough, no matter how many tell you they will.
Twitter is going to a very exciting stock with lots of buzz and chatter -- and I have no interest in it whatsoever. "Popular" is dangerous on Wall Street. I vastly prefer boring with an excellent chance of long-term profits.