Is Twitter worth its $10bn valuation? Yes it is and it could be the next Google

Last month there was a report saying that Twitter had officially been valued at more than $9bn following an offer to staff by asset management firm BlackRock. That provided a new valuation of the microblogging firm, which had previously been valued in the $8bn and $11bn ballpark. Nice park.

Last night the Wall Street Journal published a story where a writer spent a week trying to write a column “that proved Twitter wasn’t worth $10 billion”.

You can understand why. This is a company if you look at its current revenues isn’t a $10bn company, but everything else points to this being the case, which is why the writer gave up.

The biggest clue bar none to Twitter’s value is its impact on everyday society, its cultural universality, the way in which the language that in part defines and describes it, the #hashtag, 140 characters and trending, is becoming the zeitgeist.  You saw it at London 2012, the BRIT Awards and at the Oscars. You see it on TV everyday and you saw it in the re-election of the Barack Obama.

However, all of this, like much else in life, rests on Twitter’s ability to make money. As we have all read by now it took a big step towards that last week when it launched its advertising API. It is the ads API which will be part of the engine that will power Twitter’s future success.

As the WSJ notes Twitter has the potential to match some of the money making properties of Google.  It is this that has helped Twitter to reach a valuation of $9bn while others, as does the WSJ, put the value at above the $10bn mark.

“This is remarkable because Twitter has been in the money-making game for only three years, primarily selling “sponsored tweets” to advertisers whose come-ons pop up in the message streams of the service’s 200 million-plus active users.

“It’s working. Advertising-data-firm eMarketer Inc. estimates 2014 revenue at $808 million, but people in the venture-capital community are already whispering that Twitter will break $1 billion by then. In fact, eMarketer will soon revise its figures upward though it won’t say by how much,” the WSJ writes.

As we’ve already established Twitter isn’t worth $10bn right now — if you look at what it is generating in terms of revenues. It is valued at such a level based on its potential, based on how big it will get. The WSJ using numbers from a new research firm called Triton Research sees echoes of Google past — still the web’s biggest money making machine.

Those figures estimate that with still relatively new advertising products, such as Promoted Tweets and Trends, Twitter is generating around $4 for each of its 200 million-plus monthly active users. It estimates that over the next three years this could rise to $7 per user by 2016.

This issue then becomes how large can it grow its active users base? Can it match the billion members of Facebook? That will be, as the WSJ says, the challenge.

But it already has a number of competitive advantages in its favour that come with being a major platform that has won widespread adoption. It has good margins.

“Twitter won’t divulge figures, but people in the venture community, including some Twitter backers, say its margins are as high as 30% to 40%.

“For simplicity’s sake, let’s reduce Twitter’s net margins to Google’s, which are a gusher-like 21%. Value all those earnings at Google’s 17-times-trading multiple, and, voilà, Twitter has a value of $12.5 billion. And you needn’t tweak conditions much to get a higher number.

“What could go wrong? The major worry is international growth. Advertisers may also have a natural limit on their Twitter spending. Unlike many users of Google or even Pinterest, Twitter users aren’t browsing with a clear intent to purchase. And then there is Twitter fatigue, in which users may feel deluged by information. The company will have to invest to prevent this,” the WSJ reports.