When an investment banker evaluates a company for an IPO, he will make a table showing the relative valuation of the stock compared to like companies.
Recently, social media companies have made popular initial public offerings.
Forbes posted such an evaluation including TWTR. You will find it here.
http://www.forbes.com/sites/darcytravlos/2013/11/30/what-are-you-worth-to-social-media-stocks-it-must-be-more-than-advertising/
This is a very well done analysis.
If you look at the table given, you will see that TWTR has a valuation behind Facebook and LinkedIn.
While Twitter's market cap is almost that of LinkedIn, its revenues are only a fraction of LinkedIn.
While TWTR's revenue per member is half of Facebook and LinkedIn, its market cap per member is about that of Facebook and LinkedIn.
This chart tells us that TWTR has the highest valuation of the eight social media stocks listed.
However, the most important factor in such a chart is missing. This factor is growth. Growth juices investors more than anything else. It should have been one of the first factors listed.
We suspect that those who are paying up for TWTR stock are motivated by its growth potential. They argue that TWTR has a huge market left, and that it will be able to monetize that market and that the revenues will accelerate.
Frankly, I regard paying up for growth to be one of the most risky things you can do. Sooner or later competition shows up to curb your growth. Sooner or later your markets are saturated.
If the company releases its sales and earnings and the growth is suddenly, unexpectedly slowing -- not declining, just decelerating -- the stock will suffer great and rapid pain as the market re-evaluates the multiples used to compute price.
Such a stock could lose one-third of its market value in one day.
Only someone with a working crystal ball can confidently predict growth.
As it is, we still do not see the upside in Twitter at this valuation.
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