Roni Michaely is a professor of finance at the Samuel Curtis Johnson Graduate School of Management at Cornell University. He conducts research in the areas of corporate finance, capital markets, and valuation. His current research focuses on conflict of interest in the capital markets, corporation payout policy, and the pricing and optimal trading mechanisms of IPOs.
He comments on the recent Twitter IPO and weighs its potential risks and benefits.
“Twitter seems like a classic IPO, since it ignites investors’ imagination. It is an innovative company that has done what once seemed impossible. It is very difficult to speak about valuation, and indeed analysts put its value anywhere between $12 billion and $20 billion. Given Facebook’s market value of $125 billion, this does not look unreasonable, based on revenue comparable and number of users — and the fact that Twitter is growing faster than Facebook.
“Twitter has about 220 users out of more than 1.2 billion people with smartphones — the most likely potential user base. If one expects about $1 billion in revenues next year, then a valuation of $15 billion does not seem unreasonable, especially relative to Facebook.
“But clearly, the potential risk is high. One has to remember that Twitter does not yet make money. It is losing money. And the entire valuation is based on future cash flows and on growth in advertising revenues. This, in turn, critically depends on growth in users and the revenue margin per user.
“In sum, given the current environment, Twitter’s name recognition, and its growth prospects, I will not be surprised if Twitter’s valuation exceeds the $15 billion mark.”