March 08, 2011, 12:42 PM — Maybe it's the Sheen Effect. Or maybe private investors are throwing caution -- and reason -- to the wind when it comes to Twitter.
Whatever the underlying causes, a recent auction of Twitter shares in a secondary market pegs the microblogging service's valuation in excess of $7.7 billion.
In mid-December, after a round of venture funding, a Twitter spokesman valued the company at $3.7 billion. And just last week, a potential investment by J.P. Morgan Chase put Twitter's value at $4 billion.
But that was so, um, last week. Here's the latest, courtesy of Mashable's Stan Schroeder:
According to Sharespost, a secondary market that lets investors trade with otherwise illiquid assets, investors have agreed to buy 35,000 shares of Twitter’s Series B preferred stock at $34.50 per share. Multiplying that figure with the 223.7 million fully diluted Twitter shares listed by Sharespost one gets a staggering $7.718 billion.
Again, this is for a company that research firm eMarketer predicts will generate revenue of $150 million this year and $250 million in 2012. That's a paltry amount of revenue for a company with a $7.7 billion valuation. In comparison, Yahoo (NASDAQ: YHOO) has a market capitalization of $22 billion, or about three times the latest Twitter valuation. Yahoo's revenue in 2010 was $6.3 billion, or about 42 times Twitter's estimated revenue for this year. Which is the better investment?
Trick question! Going by the revenue multiples, Yahoo is by far the better bet. But there's more to consider. Yahoo is treading water, looking for a viable way to compete with Google and Facebook for online advertising dollars. Revenue has been stagnant for a couple of years.
Twitter, on the other hand, presumably is on the ascension. Yet it still has to prove it can grow revenue and profitability. So a bet on Twitter is a bet on future growth, with little track record to go on.
Maybe that's the kind of risk Charlie Sheen and his friend Gnarls Gnarlington would take before breakfast in their underwear, but not everyone has tiger blood and Adonis DNA.
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.