Valuing $TWTR | The Acquirer's Multiple®

During his recent interview with Tobias, Elliot Turner, Managing Partner at RGA Investment Advisors and Twitter guru discussed Valuing $TWTR. Here’s an excerpt from the interview:

Tobias: Can you break down how you think about the valuation of Twitter for us? What the drivers that we should be looking at as we think about that, too?

Elliot: Yeah. One other point that I want to make on the structure of Twitter and coming out of this big mess before, like going to exact monetization, because I think it’s important for one of the most important KPIs in the business is that when Twitter was built, Twitter was this big heaping mess. There literally was no twitter.com. It was an API, and it started with over text message, but then there were these various gateways that other people built accessing the API.

There was no Twitter. It wasn’t built as a site, and that’s really different than a lot of these other companies that are out there in web land. It’s got its pluses and minuses, but for Twitter thus far, it has had way more minuses.

When twitter.com became an actual site, that process was really messy. It was this group behind TweetDeck, that was actually rolling up these other gateways, and access points to Twitter. Twitter eventually ended up buying TweetDeck and building their own Twitter.com. It was like a really haphazard, messy process, and they had a lot of code debt, and they didn’t have an actual underlying, way to build product, to push new product, to market to experiment. They were encumbered by their past in a big way. I think that had a lot to do with what went wrong.

So, when you’re thinking about valuing Twitter, how this all relates to valuing Twitter is the first re-foundational piece of rebuilding Twitter when Jack Dorsey came in, was rebuilding their user experience, the whole user side of the platform. That involved things that were not just code related, it involved making really hard choices about what safety looks like, about what it means to be– make a forum where people could actually engage. They had to make a lot of hard choices, had to face a lot of challenging questions, were put in certain positions where they could– where some of these hard choices made sure that no one was happy. It’s a really hard place to be, but they did it.

They just recently rebuilt their ad tech stack. In rebuilding the user side of things, you really started seeing the progress about a year and a half ago that user growth actually started again on the platform, they had stagnated for nearly a handful of years without being able to add any new users on the platform. When you think about valuing Twitter, they give us two KPIs to work with basically. They don’t even really give it to you, you have to figure out the ARPU side of things, but you have ARPU, and you have how many [unintelligible [00:32:52] you have, and you have to think about how each of them are growing or not because ARPU in particular had taken a meaningful drop this year after flatlining, the prior two years.

Tobias: Why was that?

Elliot: Okay, so in 2019, ARPU was trending upward nicely in the first half of the year.

Tobias: That’s average revenue per user for the folks– [crosstalk]

Elliot: Exactly.

Tobias: Sorry, I cut you out. It’s $25 per user.

Elliot: They are $25 per user, well, in 2018, and 2019. 2019 was looking like it was going to be better than 2018, but then in the second half of the year, they had these big problems with one of their revenue products called Map. If you know those little tweets are– really on any platform, any ad that’s asking you to install an app, that is Map.

In certain markets for Twitter, especially Japan, really, really meaningful revenue product. In Japan, if you figure out ARPU, they don’t disclose it. Roughly speaking, they were down somewhere by the order of 20% ARPU in Japan. Now Japan’s a really important market for Twitter. It’s their second-biggest market in the world, after the US. Losing 20% of your revenue per user, that’s a pretty big hit. Interestingly-

Tobias: Material, yeah.

Elliot: -ARPU was up in the US in 2019, but in aggregate, their ARPU was down fractionally overall. Then obviously, with COVID, ARPU took a really meaningful drop. That had to do with the fact that Twitter itself is something around 80% of all advertising on Twitter is what you’d call top of funnel brand advertising. It’s like the Procter & Gambles of the world who try to raise awareness about a brand as opposed to direct response, which is what you see far more on Facebook.

When COVID happened, brand budget stopped, and all of a sudden, the floor fell out. It’s really come back in a big way and it’s gotten stronger. But Twitter has to do a lot of work to improve their revenue product to broaden the kinds of opportunities to give advertisers. It really required rebuilding their entire tech stack from scratch. There’s some great blog posts on the Twitter infrastructure blog, that explain why they were in this problem, what it meant and how they could fix it. Now that the new ad tech stack was launched in the second half of this year, they could iterate on things much quicker.

So, you starting to see things like carousel ads. Just yesterday, they announced that they’re finally doing frequency caps. And a lot of people are like, “Ugh, this is so Twitter. There’s so much low hanging fruit, why haven’t they tackled this sooner?” Clown car, blah, blah, blah. Actually, I mean, I get why they hadn’t done it. They weren’t able to. They were encumbered by their past and they had to re-platform and build this foundational stuff.

When I think about Twitter, when I think about valuation, when I start, the first thing you could do is simply back of napkin say, “Well, okay, they’ve had huge growth in their user network,” the last year, nearly 30%, year over year. You take that growth in the user network and say, “Okay, I’m going to slap on my 2018 or 2019 ARPU of 25 bucks and I’ll say, “Okay, look, they’ve given me long-term guidance on what their EBITDA margin range would look like.” They said, 40% to 45% EBITDA margin range. They’ve delivered within that range in the past, though they had been below it last year.

Let’s say, they end up at 35%, instead of hitting the low end of the range. You take that the 186 million users multiply by $25 ARPU, apply that 35% margin. That’s $2 billion in EBITDA on a mid $30 million market cap with $4 billion of net cash, which should be growing just if the user base keeps growing, even if it slips to the mid-double digits from 20%.

That’s pretty nice in this market for a platform that has, I think, still a whole lot of low hanging fruit and a lot of optionality, and a lot of interesting things they could try to capitalize on. Then, if you come at it from a DCF, the way I do it is I take them up to that 2019 ARPU by 2024, get them by 20– I’m like, unfair in it, because I had to, like temper myself, get them to the low end of their margin range by 2028 and apply my terminal multiple, then you’re talking about a stock that should be in the mid $60.

One of the beauties of it all is I think the best business model for Twitter might be one that they’ve yet to even explore. They’re finally truly dropping hints that they’re going to do it. I think some sort of premium offering, which is built around– I originally was like– when I would talk to the company, I’d be like, “Are you going to do premium feeds? Are you going to do subscriptions?” Blah, blah, blah. And then they’re like– I feel like that phrasing rubbed people the wrong way.

So, I’ve started calling it creative empowerment. When are you going to do some sort of creative empowerment, and I think it matters because to me, creative empowerment means more than just creating a business model. It means you’re giving creatives tools, and you’re giving them an opportunity to make revenue.

You’re giving them tools to enhance their creativity and enhance their ability to reach audience with their creativeness and you’re giving them an actual way to make money. In exchange, you take a little bit of a cut. I think that would be something that could be a billion-dollar revenue line for Twitter down the line.

Tobias: When you think about Twitter– I don’t know how to resolve it, but there seems to be this ongoing censorship issue with it. It’s meant that there have been some competitors, like gab.ai and Parler have popped up. It’s still in an ecosystem where– we’ve discussed previously, it’s not necessarily a social network in the way that Facebook is a social network, or the way that Instagram perhaps is a social network, but it’s still sort of thought of as in that kind of category of things, that sort of thing. How do you see it, resolving these issues and competing with the new and the incumbents and whatever else comes along? TikTok?

Elliot: Yeah. This is like one of the biggest, I think, challenges for Twitter. Say what you will about the president, he has put Twitter in a corner where no matter what decision they make, they’re going to have people that are really angry at them. If they don’t– censor might be too strong a word because I think they really just like added context to certain things that it actually censor.

Let’s leave semantics aside. If you don’t censor, you’re going to have a whole lot of people that are angry at you for letting them violate like very– not even grey area rules on their platform, black and white rules. Why is this guy above the rules of your platform?

On the other hand, if you actually do moderate or censor, then you’re going to have a whole lot of people that are like, “He’s our president! How could you moderate or censor him!? He should be able to say whatever he wants.” They were in a lose-lose situation. But the fact of the matter is there are a lot of people who say things, and I think this is one of the most mistaken impressions, that Twitter needs the President because he gives them engagement.

If you actually went around and spoke to a lot of advertisers, he is the worst thing that’s ever happened for the platform because no one wants their copy to be run alongside engagement that’s based around things that get people angry. No one is worse to market to than an angry person. An angry person is literally– they’re factually putting up an emotional wall to being swayed on anything.

Tobias: I need to buy that gun now, Elliot. I need the gun immediately. I don’t need the waiting time.

Elliot: Exactly. Yeah, that’s about all you can market. People aren’t amenable to being swayed by marketing in those kinds of moments. A lot of advertisers actually shut off entirely. Say what you will about engagement, I mean, that engagement is worth, I’d say actually negative value, because advertisers will shut off in other areas. Now, the interesting thing about Twitter is politics is just one niche on Twitter.

Tobias: It’s best avoided, in my humble opinion.

Elliot: Absolutely. There’s FinTwit, which I think is one of the most amazing communities in the world. There’s basketball Twitter, there’s music Twitter, and within every broad label, there are very niche Twitters. During COVID, I really learned a whole lot about the science Twitter community. There’s a really big community around there. I’m blanking on the guy’s first name, his last name [unintelligible [00:41:39] wrote a great substack about Twitter as the new peer review, and how a lot of science in general has been moving faster because of these communities that are built around Twitter, where you can share your research and get real-time feedback, real good, critical, smart feedback that helps you refine your own research process.

And who needs peer review, when you could do it in real-time and iterate your process and move it along that way? That could literally only happen on Twitter. You’re not going to do that on Instagram, where you’re sharing kitten pictures of yourself with your kids and your family on the ski slopes or something like that. It’s just not the right format. It’s not the right platform for it.