Wednesday, November 6, 2013

BCOR flying today; an attempt at valuing TWTR ...

BCOR is certainly flying today, up 18%+.  We could say that we 'downgraded' the stock one day too soon; then again, we suggested it when basically no one had any confidence in the Company in late Jan '13.  And we certainly cannot complain about the near 60% gain from then until yesterday.  We note that as the stock is now trading at around $29/sh, its search business is no longer attractive for a potential buyer.  The current stock price is implying an EV/EBITDA multiple of 9 for its search business which we believe is too high given the increasing risk of its dependency on GOOG.  We believe companies such as IACI may consider acquiring BCOR's Infospace (search business) if the BCOR stock comes down to around $21/sh, which could imply 5x Infospace's 2014 EBITDA.  The buyer could pay a 20% premium or 6x EBITDA for Infospace.  But we will see where this goes, and for now we remain on the sideline regarding this stock.

Twitter (TWTR)

Let's move on to the hottest topic on the Street these days, Twitter (TWTR).  We think TWTR has an EV of $13.18bil.  It will begin trading on the NYSE tomorrow.

The Company basically provides a microblogging service, meaning users can create accounts (for free) and post their thoughts regarding any topic that they like.  It is actually designed for this day & age where everyone is mobile and attention span is getting shorter and shorter.  The 'micro' part of the blogging means that the messages users post can only be 140 total characters: short, and hopefully sweet and to the point.  In addition to text, users can post pictures and short videos.  

Although users have the option to keep their account private, many do not, which means that anyone can follow anyone without approval.  This creates basically an open network.  Twitter's original 'hashtagging' feature also allows users to market certain ideas more effectively by attaching a hashtag (#) to the word(s).  This helps other users to more easily search for certain word or phrases and see thoughts of others regarding those words and phrases.  

We assume many have already seen how TV networks, websites, and other blog sites utilize twitter to market their offerings.  The same is being done by companies and advertisers.  Targeted advertising to twitter users may actually generate a good ROI given that TWTR and advertisers learn a lot about the users based on which other users they follow, which messages they "retweet" (RT), which words they 'hashtag' and to which ad messages they respond.  

TWTR is being used in real-time by users when watching TV, NFLX, Hulu, YouTube, etc.  So, the content providers can actually get real-time feedback from their viewers via TWTR.  Users also engage in discussions regarding live events, such as sporting events, in real-time.  Most famous or notable personalities in the world are active on TWTR.  They include world leaders, athletes, and artists of all kinds.  

Simply put, TWTR can generate a lot of useful data off of its users; and advertisers may be willing to either pay for that data and/or create ads on TWTR based on that data.

We have created a model for TWTR going out to 2018.  Based on some independent social media ad spending research (conducted by Nielsen, BIA/Kelsey, Digiday, etc.), we think social ad spending will grow at a CAGR of 17% the next 5 years.  Of course, growth will be different for some companies such as TWTR as it is one of the most popular social media platforms.  In addition, it is what we like to say "born to be mobile".  Given FB's success in generating mobile ad revenues, we think many companies and advertisers are eager to jump on the TWTR platform … or bandwagon.  

Our revenue estimates for TWTR, which go out to 2018, represent a CAGR of 25%, higher than our FB assumption as TWTR has a more open network to utilize and it is in an earlier growth stage than FB was when it had its IPO.  We expect monthly active user (MAU) to increase from 232MM in the September quarter to more than 750MM in FY '18.  Timeline views, or the number of times users refresh messages on their screens or search for things while logged in, we think, will more than quadruple by 2018 from where it was in the September quarter.  And revenues generated from each 1,000 time line views per quarter, we think will grow at a 13% CAGR from 2013 to 2018.  Of course growth in ad revenue per timeline view will vary in different regions.  US is likely to grow fast the first couple of years and begin flattening out a bit, while the international market will accelerate its growth starting in 2015.  

In terms of adj. EBITDA, we look for margin of 1.8% in FY '13 to grow to 8.7% and 16.0%, or $101.1MM and $206.1MM, in FY '14 and FY '15, respectively.  Most of the margin expansion will be driven by lower R&D and sales and marketing expenses.  We think those expenses will further decline as % of revenues once the international market becomes easier to monetize.  We believe the Company can generate adj. EBITDA north of $1.00bil in FY ’18.  From a GAAP standpoint, we don't see TWTR generating net income until FY '16.

Regarding valuation, we used a 5-year DCF model which generated an EV of $13.18bil for TWTR.  Our assumptions used to calculate the discount rate were pretty much similar to those used in valuing FB.  For the terminal value, we used an adj. EBITDA multiple of 17x, which is GOOG's ttm EBITDA multiple.  With regards to the value of TWTR stock, it really depends on the number of shares used to calculate it.  We used what we estimate to be the fully diluted share count of approx. 705MM, which resulted in an $18.90/sh valuation.  This share count includes not only the 70MM being offered, but also the 10.5MM additional shares option given to the underwriting group, as we think demand has been high.  In addition to including other options in the diluted count, we included another ~ 14MM related to TWTR's acquisition of MoPub.  Others may have used a share count of approx. 555MM, which then would give a share value of $24.00 for TWTR.

This IPO will likely be more successful than the FB debacle we saw in May '12.  However, given the financial information available in the TWTR S-1 filing, some industry numbers, and the wild guesswork involved in completing a DCF valuation model, we think TWTR has an EV value of $13.18bil, which equates to a market cap of $13.33bil after adding net cash of $160.6MM.  We will see how far that Twitter can fly tomorrow. By the way, readers can 'tweet' this post, if they'd like.  We thought we'd give it a try. :)

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