There are multiple ways for investors to view Twitter Inc (NASDAQ:TWTR). The growing microblogging site’s shares trades at an incredible value that is more than 100 times its earnings. The social media company’s valuation is at $25 billion, which falls short behind of Facebook Inc (NASDAQ:FB) and trails behind LinkedIn Corporation (NASDAQ:LNKD) by a few billion dollars.

As with any stock that trades at such a high multiple of its current earnings, the real question is if the stock will live up to those expectations over the next few years. Can Twitter discover a way to increase user engagement with users that do not post or generate content? These issues plague Facebook as well, who is struggling with losing prime teenage users and could possibly have reached its peak. It all depends on how an investor sees those situations, and whether to buy or sell the stock.

Declining User Growth and Low Revenues Per User

Twitters most pressing problem right now that that its user growth is falling short of expectations in monthly active users. This metric is only growing by 24 percent year over year. The company counted a total of only 271 million at the end of the second quarter of 2014, which dwarfs in comparison to Facebook’s 1.3 billion user count at the end of the same quarter. Investors can see that as an opportunity to grow or a sign of a failing service.

Those numbers directly affect advertising revenue. Twitter’s timeline views hit 173 billion during the second quarter of 2014. This metric determines how much engagement users are having with the microblogging site, and is much more important than the total number of users the site has. The company’s timeline views increased only 15 percent year over year, a concerning small rate of growth. To be fair, Twitter did streamline conversations into a single timeline view, which had a small affect on the actual growth rate. Additionally, the company’s management board is determined to push forward with this plan, convinced that it will decrease views per user while increasing the site’s efficiency by displaying more relevant data to them.

Twitter’s average revenue per user for the second quarter of 2014 reached $1.02. This figure is significantly lower than Facebook’s, most likely because Twitter is one year behind Facebook’s efforts to make money off of users. Facebook reported an average revenue per user of $2.24 for the second quarter. Last year, the social media giant had only $1.60 in revenue per user.

The key metric that Twitter uses is advertising revenue per thousand timeline views. This metric hit $1.60 in the second quarter of 2014, which was a 100 percent increase year over year. Thus, Twitter is experiencing marginal user growth as well as significant increases in advertising demand.

Growth Rate

Analysts are predicting that the company’s 5 year earnings growth rate will be roughly 112 percent. Other industry experts are reaching even further and forecasting a 200 percent growth rate for the microblogging company.

GSV Capital Reduces Risk

The most preferable way to invest in Twitter is via GSV Capital (NASDAQ:GSVC), an investment fund company. The fund’s shares trade at a significantly lower rate to NAV, and given that Twitter is the largest position, this is a way to limit the downside risk in owning to directly buying Twitter’s stock, which is known for its wild swings in price.

Currently, GSV Capital shares trade around the $10 mark, even though the NAV was roughly $14.8 at the end of the second quarter of 2014. The investment fund controls about 50 investments in venture capital companies, but its largest investment is in Twitter, which the fund holds 21.1 percent stake. GSV Capital has risks that certain other dominant positions in private companies, such as Dropbox or Palantir Technologies, lowers in value, which then offsets the NAV safety net.

Conclusion

At the end of the day, in order to intelligently invest in Twitter, which trades at a multiple of over 120 times its earnings for 2015 and has a valuation of more than 10 times its revenues, investors must depend on the future of the microblogging site. If Twitter becomes the news source for the world, then its valuation and price of its shares today are dirt cheap compared to its future. The company has so much opportunity to grow its user base and widen its average revenue per user to catch up with the levels reported by Facebook.

The Twitter stock could be considered cheap given its metrics for valuation and the low risk method of investing in it through GSV Capital. Of course, if you are absolutely certain that Twitter will rival Facebook in valuation one day in the future, then by all means buy directly into the Twitter stock to capture all the benefits and upside.

 

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