China Rival Actually Makes Twitter IPO Look Better
One of the loudest criticisms of Twitter’s looming billion-dollar initial public offering is that the company is going to have a hard time cracking the massive Chinese market. But I believe that the comparison may actually justify higher valuations when the “micro blogger” hits the market.
China is the biggest Internet market on the planet with well over 550 million users – twice as many as the United States – and with 30% of them indicating they share “everything” online, it’s a rich strategic prize for Twitter’s chatty platform.
Twitter faces two fundamental challenges here. First, the site is still banned outside the Shanghai free trade zone. While China reportedly hosts more active Tweeters than any other country, most of that vast audience is illicit, and any conventional effort to monetize their content would hit some serious official roadblocks.
Second, China already has its own universe of short-form blogging services, with the biggest, owned by local Internet group Sina (NASDAQ:SINA), already dominating the space with 97% of all the user accounts.
However, while Sina seems to have a lock on Asia’s biggest social networking opportunity, its performance there indicates that Twitter may truly be worth the $10 billion after its market debut.
If anything, Twitter stacks up as a better investment than its Chinese rival on nearly every metric that matters.
Twitter famously has 200 million “active” users around the globe who Tweet at least once a month and 100 million accounts that generate content every day. Sina may be ubiquitous in its home market, but still only boasts half as many everyday users and an overall account base 40% smaller than Twitter.
Sina is ramping up more slowly to monetize those accounts as well. Although analysts were impressed to hear that microblog revenue – a mix of advertising and premium content – tripled in the recent quarter, the entire network is still only on track to generate about $100 million a year going forward.
That’s $2 a year per active user. Twitter, meanwhile, managed to squeeze $3.19 out of every active account last year and the growth curve still points up as new promotional initiatives roll out. On a per-user basis, Twitter is already about 60% more lucrative than Sina, with double the active user base.
Moreover, while China’s consumer economy is expanding much faster than anything the West has to offer, that economy still stops more or less at the country’s borders. Sina can easily add another 1 billion accounts before every Chinese resident is signed up, so the addressable market represents potential growth of about 400% without raising questions of how the platform – which runs on the principle that each of the 140 “characters” represents a word and not a letter -- will translate across cultures.
Twitter has demonstrated its ability to cross linguistic zones and still has as many as 6.6 billion people left to sign up if Beijing further relaxes its rules. Even if Sina ends up owning the entire Chinese microblogging market, targeting everyone else on the planet can theoretically support long-term growth above 1,000% for Twitter.
As it is, there are already 3 active Twitter users for every U.S. resident cheerfully tweeting and the proportions keep shifting every day. Unless Sina goes global, Twitter still has the upper hand.
Besides, Twitter says 75% of its revenue capture is from the U.S. market, which means it’s earning $4.40 a year per domestic user and a mere $0.50 per active international account. That’s a potential hurdle because those accounts represent the lion’s share of Twitter’s operational growth, but it’s also not a bad base for future development.
Valuation: Going Inside the Numbers
For both Sina and Twitter, profitability is the big question. While the Chinese site’s corporate parent has a spotty track record of quarterly wins and losses, the microblog itself has yet to contribute to the bottom line. And Twitter will evidently need more scale, deeper revenue streams or both in order to ever be attractive on a P/E basis.
Out of the two microbloggers, Twitter looks like a better bet to win the prize. The company is simply bigger, better positioned globally and is already much farther along in monetizing the richest Internet audience on the planet while holding out larger prospects for future growth.
How much should investors pay for that story? Sina recently sold 18% of its microblog to Chinese e-commerce giant Alibaba for $586 million. If anyone knows what this business is worth, it’s billionaire Alibaba chairman Jack Ma, so let’s assume for now that he paid a fair strategic price.
For the entire operation, that stake translates into an enterprise value of $3.3 billion, or 33 times current annual revenue. Yes, that looks rich, but this is still Jack Ma we’re talking about and he evidently thought the growth profile would ensure his investment pays off a lot faster than that.
On a current revenue basis, Twitter would be worth $10.4 billion on those terms, which is roughly in line with what we’re hearing about the IPO pricing.
Per daily user, Jack Ma paid $10.85. Twitter might be worth a bit more than that because its core users generate richer revenue already, but again, any market cap below $10.85 billion would seem to indicate a discount.
Beyond that, the upside has yet to be determined. In terms of revenue per active user, Twitter’s growth prospects should make even the most effusive China bulls think twice.
The core is already more than twice as lucrative per account as what SINA is raking in, so use that ratio as a somewhat arbitrary benchmark. If the millions of Tweeters in India and Latin America and the Philippines and Southeast Asia and the Middle East and Africa – not to mention Europe – can be developed to deliver even half of what Sina has created, Twitter stands to boost its revenue by $79 million a year, without having to sign one more account.
That’s not enough to meet the company’s operating expenses on its own, but it comes close. And since Twitter has also added an average of 50 million active non-U.S. users per year since 2010, it’s more likely that an expanding audience plus new revenue programs will feed into each other.
In that event, $10 billion may only be the ground floor.
Hilary Kramer is the editor-in-chief of the subscription newsletters: Game Changers, Breakout Stocks Under $10, High Octane Trader, Absolute Capital Return Portfolio and Inner Circle. Formerly, Hilary was the CIO of a $5 billion global private equity fund. She has an MBA from the Wharton School at the University of Pennsylvania and began her Wall Street career as an analyst at Morgan Stanley. Hilary is the author of The Little Book of Big Profits from Small Stocks (Wiley) and Ahead of the Curve: Nine Simple Ways to Create Wealth by Spotting Stock Trends (Free Press). To learn more about Hilary Kramer visit: http://GameChangerStocks.com.