What is Twitter worth?

That depends, but it could be a lot more than $54.20 a share

Elon Musk’s Twitter (TWTR) saga has yet to play out but the sell side analysts seems convinced the deal will hand Musk his head based on paying $44 billion for a company that loses money despite revenuesof $5 billion or so and almost 400 million users. Aswath Damodaran, a valuation expert of renown, valued Twitter at about $45 a share not that long ago. I completed Damodaran’s graduate course in advanced valuation in 2019 and concluded Damodaran was brilliant, creative and usually pretty close on valuation. I certainly benefited from the course.

But my perception of value is not based on past reported results but on potential results and a social media company with 400 million sets of eyeballs using its platform (and 240 million of those “daily active users”) provides a lot of potential.

I will digress about valuation. In 2015 I was invited to speak to a class of York University MBA’s about valuation by Douglas Cumming, then a tenured professor of Finance at York and a valuation expert himself. I chose to hand out to the class a one page summary of a factory in Cobourg, Ontario I purchased from GE Canada in 1984 for $15 million ($100,000 of my money for common equity; $100,000 of common equity from Helix Investments and $200,000 of common equity from The Pagurian Corporation Limited controlled by Christopher Ondaatje, with both Helix and Pagurian adding a combined $4.5 million in preferred share financing and a bank loan from what was then called Continental Bank of Canada. I was a Vice President of GE Canada at the time and resigned to make the purchase. The factory was well equipped and modestly profitable with annual pre-tax income the year before the purchase of about $600,000.

Most people thought I, Helix and Pagurian were nuts to pay $15 million for a molded plastics factory earning $600,000 a year. That would be the conventional analysis. I had other plans.

I turned the factory into an automotive parts producer making exterior body panels from a polyester glass composite material and spun off its other contracts to a newly created company called Fuerst Manufacturing which Walter Fuerst, another GE manager who left with me, located in Cambridge, Ontario. The Cobourg operation was put into a subsidiary of the company I created for the deal - The Enfield Corporation Limited, and the subsidiary was called The Complax Corporation. The deal closed April 6, 1984 and we set June 30, 1984 as the first year end. In its first full year of operation post purchase from GE Canada (the year ending June 30, 1985), Enfield earned $7 million and the following year $25 million including a gain when Enfield sold a half interest in Complax for $30 million. In the third full year Enfield made $63 million the bulk of which came from my investments and much of that from investments in oil & gas companies.

I proceeded to build Enfield through acquisition and by 1989 had over 9,000 employees, about $1 billion in assets, and a profitable record with net income first four years totaling about $135 million. Enfield had redeemed the preferred shares in its second year of operation and Helix sold its shares the next year for about $42 million. The class of MBA’s thought the purchase of the plant from GE Canada was a bad idea before the outcome was disclosed. We weren’t nuts, the value was prospective rather than backward looking, and the returns were outstanding.

Turning back to Twitter there is a lot of potential which Musk can harness to make the deal deliver value. Here are a few points.

1. First, Musk needs to run off the left wing nutcases who populate Twitter management and make it a shill for the Democratic party and progressive ideas. That makes the “public square” appeal of Twitter less valuable and is a misuse of its potential.

2. Second, Musk can make this social network transparent and improve its attractiveness to advertisers. There is not reason why Twitter cannot be a valuable mechanism for advertisers to promote their products to users who demonstrate an interest in those products and avoid bombarding users with ads in which they have no interest. Twitter exchanges of open conversation about the risk and merits of a given product combine to make the ads a lot more effective.

3. Third, Musk can add a lot of features. An edit button, a retraction button, the absence of needless censorship (with censorship limited to dangerous content rather than politically motivated censorship which is where Twitter is today), and, improvements in the ability to collect in one place by Tweet source all of the comments about a particular subject made for a given period.

4. Fourth, direct and confirmed identification of users and elimination of bots. People who hide behind fake accounts and bots make Twitter toxic and while that may add “users” to the user count, it does nothing to advance the value of the platform. A “public square” has real value when the identity of the speaker is known and the liability for libel or abusive conduct points right at the source.

5. Integrate the platform into payments with users able to purchase advertised products directly from the advertisers without leaving Twitter and pay for their purchases from an integrated payment application. This approach works for some gaming applications like Words With Friends.

I like Twitter for its speed of news dissemination and the ability to find groups of people who have a lot to contribute to conversations on both sides of a give subject. There is no other platform that has the same ability to host debate, and the “Twitter Mob” can be harnessed to police that debate by identifying misinformation while Twitter can police the user base since all users actual identity and contact information can be required to use Twitter even if not publicly disclosed to other users.

Twitter “spaces” have become mainstream for energy investors with groups of hundreds or sometimes thousands joining in real time to discuss the industry or a particular company and with hundreds of knowledgeable people in a conversation moderated by the host who set it up, anyone who tries to mislead the group is immediately exposed. There is nothing better than having a large group of interested people with knowledge of an industry or company to come together to discuss its prospects where everyone has an opportunity to speak if desired but not everyone can speak at once. It is an ideal forum for discussion not paralleled anywhere else.

One group called “The Canadian Oil Mafia” has thousands of participants and hosts informative discussions that have literally made me hundreds of thousands of dollars through my related investments by having many investors all with different educations, experiences, competencies etc. discuss a subject and contribute their knowledge and competence. That alone is more than worth the price of admission (which today is zero) and would be worth paying for a subscription if that was needed.

Improving Twitter involves little more than knowledge and competence and elimination of wasteful expense on salaries and benefits of employees who contribute nothing and think their employment gives them the right to advance progressive ideas and suppress dissenting views. We get enough of that from mainstream media and it has no place in the public square.

Incremental improvements in Twitter have big rewards. Today revenue is about $25 per daily active user and it would not take much to increase that to $30 with a better advertising marketing approach and integration into a payment application so that users can buy directly from their Twitter feed. Twitter “spaces” has vast potential for companies wishing to host investor discussions and present their quarterly results, a better forum than the currently “analysts call” approach today which I find useless. Getting the CEO and CFO of a listed company in a Twitter “space” with thousands of shareholders or just interested investors would be a popular forum. That has already started to some extent with the COM inviting executives from oil companies to speak to a Twitter “space” group with a high degree of success.

Here are a few goals for Musk:

1. Increase daily active users to 300 million by converting less active users and encouraging people with a massive following (like Donald Trump) to use the platform instead of blocking them for political reasons. Trump alone had almost 90 million followers.

2. Target revenue per active user of $30.00

3. Take out $2.5 billion of needless expense, bringing expenses back 2019 levels. What one Earth did Twitter need that much expense for anyway?

All those goals are within reach in my opinion, but result in revenue of $9 billion instead of $5 billion, operating income of $6.5 billion instead of a small loss, and potential for substantial growth as Twitter becomes a channel for direct communication from public companies to investors and advertisers to customers.