Twitter will need to be insanely profitable just to hit its valuation

November 7, 2013

(Photo by rfduck)

If you're considering whether Twitter is a good investment now that it's officially on the stock exchange, it might help to look not only at what future opportunities might hold, but also what it will take to get there.

Trading on Twitter has just begun, with an initial share price of $45.10 and a valuation of over $25 billion.

So far, the morning has been a huge success on the one hand for Twitter, which set its IPO price at $26 a share on Wednesday night. On the other hand, it's indicative of how much farther the company will need to climb in order to justify its IPO. Dartmouth economist Anant Sundaram puts it this way to the Wall Street Journal:

For example, to get to even a valuation of $8 billion, Twitter will need to grow its revenues at a compounded growth rate of nearly 30% per year for the next ten years.

That's pretty ambitious. But given that Twitter's current valuation is now so much higher, Twitter would need to perform ridiculously well over the same time frame to fulfill what investors see as its potential. Along the way, it will still have to deter potential rivals, develop a more innovative business model, grow its user base (which, in the United States, is still remarkably small) and fend off the worst threat to its long-term prospects: age. Will Twitter still even be cool in 10 years?

 

Brian Fung covers technology for The Washington Post.
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