Is Twitter really worth more than $4 billion?

Potential investment by J.P. Morgan Chase fund puts lofty value on microblogging service

In yet another sign that social networking services are the hottest investment on Wall Street, Twitter reportedly may be in line to receive an investment that would value the microblogging service at more than $4 billion. (Also see: Ad invasion of Twitter just beginning) Citing "people familiar with the matter," the Wall Street Journal reports that a new $1.2 billion digital growth fund run by J.P. Morgan Chase is looking to invest in Twitter. No agreement has been reached. Founded in 2006, Twitter began generating revenue only last year, primarily by charging advertisers for "promotional tweets" aimed at the microblogger's more than 200 million users. Research firm eMarketer forecasts Twitter's revenue to be in the range of $150 million this year and $250 million in 2012, which is pretty slight for a company presumably worth more than $4 billion. However, Twitter's revenue multiple isn't much worse than Facebook's, which eMarketer forecasts will pull in $4.05 billion in ad revenue this year and $5.74 billion in 2012. Facebook has an estimated value of $50 billion to $75 billion, depending on who's blogging. Twitter's assumed value has grown rapidly in the past 18 months, from $1 billion in September 2009 to $3.7 billion in December 2010, and now perhaps in excess of $4 billion. Recently it received $200 million in funding from Silicon Valley venture capital firm Kleiner Perkins Caufield & Byers. Despite Twitter's status as arguably the second-hottest social networking company (after Facebook), less than 10 percent of Americans have accounts. Further, while Twitter's global base of 200 million registered users sounds impressive, Twitter has a retention rate of only 40 percent, according to Nielsen Online. This means that 200 million figure includes millions of abandoned accounts that haven't been deleted. It's hard to market to a ghost. The other thing that's rarely mentioned when discussing Twitter -- and I like Twitter, for what it is -- is that millions of accounts are marketing-driven themselves. Every publisher, PR professional, social media guru and corporate account -- and the list could go on -- is on Twitter to pimp a product or service. That part of the Twitter user base isn't going to be receptive to advertising. They're too busy working the room.

Chris Nerney writes about the business side of technology market strategies and trends, legal issues, leadership changes, mergers, venture capital, IPOs and technology stocks. Follow him on Twitter @ChrisNerney.

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