October 30, 2013

Doug Kass: Id Pay $32.50 a Share for Twitter

Hedge-fund manager Doug Kass, once a Twitter quitter, says he’s now “manifestly bullish” on the microblogging platform.

“It is my view that Twitter’s shares will likely double in the first month of trading — or maybe sooner,” Mr. Kass, president of Seabreeze Partners Management Inc., said in an email.
No profits? No problem.
“Given the lack of competition in its space, Twitter’s current monopolistic market position suggests a likely quick acceptance as an “anointed stock,” replicating the action of Internet service provider America Online (AOL) in the early 1990s and Internet goods seller Amazon (AMZN) in the mid to late 1990s. As such, Twitter’s share price may not be required, as most stocks are, to achieve visibility of early profits. Indeed, pegging the company’s share price (similar to AOL and Amazon back in the day) to the traditional metrics of profits and cash flows will not likely be a headwind to appreciation over the next few years, as its dominant market share and top-line growth will be conspicuous.”
Mr. Kass, a market commentator, who holds a prominent place in the Twitterverse for his investing ideas and broad-market calls,  said he was quitting Twitter back in July. At the time, he cited the constant criticism and skepticism he faced on a daily basis from his more than 60,000 followers, claiming there were “too many haters” on the social-media site.

“At that time, I found it too cumbersome to navigate the Twittersphere of sharks in order to find the good fish,” he said on Monday. “That said, I returned to Twitter on Oct. 8 after a four-month summer vacation, which speaks volumes of the potential utility I see in Twitter.”
Mr. Kass himself acknowledges the doubts he normally has over a company that isn’t profitable. “I feel I must emphasis that it is not in my DNA to normally be excited about the share price prospects of a company that is operating at a loss, that will be in the red for several more years and that has a share price that is not valued on fundamentals,” he says.
But Twitter is different.

Mr. Kass says Twitter is “uniquely positioned for the mobile delivery of content and advertising.” He also points to Twitter’s monopolistic position as a reason to be optimistic. “Twitter has a long runway ahead of it, where it faces limited direct competition,” he says.

From Mr. Kass:
“The offering price will represent about 11 times estimated enterprise value to sales for 2014 and 7 times estimated enterprise value/sales for 2015. This compares to about an 18x multiple if we use a universe of peers such as LinkedIn (LNKD), Zillow (Z) and Facebook, but the three- to five-year sales growth rate at Twitter is expected to be about 70% annually (down from 106% growth in 2013), which is approximately twice the rate of revenue growth of the four peers mentioned above. Twitter’s ratio to its peers based on enterprise value per monthly active users is low (at only $55 compared to an average of $114 for the three peers) and provides an upside monetization opportunity. The company’s average revenue per user is $2.20 — Facebook’s ratio is $4.32.”
“Bottom line: I would pay up to $32.50 a share for Twitter’s common shares.”