Macro Wrap – Just Show Me the Mobile! $TWTR, $GOOG, $FB

by Enis November 4, 2013 6:32 am • Commentary

Twitter’s long-awaited IPO will take place on Friday.  The company is expected to be valued at over $10 billion.  Of course, the market’s debate on how to appropriately value Twitter will continue for many months to come.

Though the Economist is not where I often go for individual company assessment, last week’s issue did have an eye-opening table with regards to Twitter’s expected Price-to-Sales ratio on the IPO:

Screen Shot 2013-11-04 at 6.13.36 AM

Yet, given the relatively euphoric overall investment backdrop, the article ended with a spiel that has become all too common in the past 6 months:

But investors who like volatility may still want to take a flutter on Twitter’s stock even if the price is somewhat higher. Given all of the hype around the company, Twitter’s shares could spike upwards immediately after its IPO, allowing investors to mint money by buying and selling quickly. So Twitter’s flotation could be a great short-term trading opportunity. But at anything above $18 each, its shares will be a poor long-term investment.

I’m personally not a buyer the long-term investment thesis of Twitter (or FB, or LNKD, or YELP) at current valuations.  But what are the merits of the bull case, especially given the most recent set of earnings releases?

Goldman Sachs Research had a terrific estimated breakdown of GOOG’s most recent advertising revenues by source:

Desktop Search. Based on our work, we estimate desktop search revenue on a gross basis will be flat this year and in 2014 at roughly $33.2bn.

Mobile Search. We estimate mobile search revenue on a gross basis will grow roughly 100% this year to around $9.5bn. For 2014, we are forecasting mobile search to grow roughly 70% to $16.1bn. We include search revenue from tablets in our mobile estimates.
YouTube. For 2013, we expect YouTube revenues to grow 36% to $6.6bn. In 2014, we estimate YouTube will grow 30% to roughly $8.6bn.
Google Display Network. We estimate revenues from the Google Display Network and the company’s other display initiatives will grow 50% this year to roughly $1.3bn and nearly 40% in 2014 to approximately $1.7bn.

At current expected growth rates, Mobile and Video (YouTube) are expected to surpass total revenues from Desktop in 2015.  One look at this year’s winners shows that Investors are looking to position themselves for the future winners in Mobile (GOOG, FB, potentially Twitter) and Video (GOOG and NFLX).

In short, while current valuations look quite rich, the investment community is giving these stocks the benefit of the doubt with the expectation that the global advertising pie is rapidly shifting.  I discussed that shift in my Macro Wrap post almost 3 months ago, title The Future of Internet Advertising:

Just like TV became the medium of choice compared to radio and the newspaper, online video is rapidly encroaching on what used to be an all-text Internet domain.  Much faster connection speeds have enabled this transition.  Aside from just displacing Internet text though, my hunch is that online video will take an ever-increasing share of TV advertising dollars.

You could throw mobile advertising in there as well.  These are real, gigantic, transformational changes for the way advertising is done.  Mobile, social, and online video media are only going to get larger.  Whether the stocks are going to go higher, however – that is a totally different question.