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Congratulations to everyone at Twitter for creating an amazing communication tool that really has changed the world. However, as an investor, I’m worried that the numbers suggest this is a risky long-term investment at the IPO price. I’m going to use the Google IPO as a comparison, as clearly it has enjoyed long-term success after the IPO.

Comparing the Google’s 2004 IPO to Twitter’s 2013 IPO

    Google IPO Market Cap was $23 billion

    Twitter IPO Estimated Market Cap is $14.1 billion. Twitter opened at $45.10, which gives a market cap of $24 billion — or $32 billion fully diluted!

Let’s look at the financials for both to see how much money they were making in their pre IPO year:

    Google’s 2003 revenue $1466m operational cash flow was $375m

    Twitter’s 2012 revenue was $317m and it’s operational cash flow was minus $28m.

So, as an IPO investor in Twitter, you’re getting a fraction of the cash flow for a third less of the cost.

Comparing Google Post IPO Performance vs Twitters Potential:

5 years after the IPO, Google had an operational cash flow of $7.8bn. For Twitter to get just $1bn of operational cash flow in the same time period, it would need to achieve annual revenue growth of 60% while increasing its EBITDA margins to 30% (way above its current 7%). This is difficult, but possible, and even then Twitter will be way behind the success that Google achieved post-IPO.

Twitter is different for two other reasons:

Firstly, there is also a fundamental difference in the product; Google is a product everyone uses because they need to, while Twitter is a product that people use if they want to.
Secondly, the founders of Google still drive the business forward, while most of the founders of Twitter are involved in other businesses.

I think Twitter is an interesting business, but it’s no Google. As a long term investor I’m waiting for a more sensible price to cash flow before considering it as an long-term investment.

Sources:

Twitter Form s-1 Registration Statement

Google Form s-1 Registration Statement

Disclaimer: The above does not constitute investment advice. The author has not invested in the companies mentioned at the time of writing but may invest in them at some point in the future.

Tim O'Shea
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Tim O'Shea

Fund Manager with 15 years' experience as a successful business owner-manager. Passionate about helping people benefit from the power of long-term investing.
Tim O'Shea
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