When Facebook tanked after its initial public offering last year, Warren Buffett shrugged it off, saying: "All kinds of stocks go down. The question is whether Facebook is worth $100 billion or $50 billion or $200 billion.”
After Twitter soared from $26 per share to almost $45 on the first day of trading, this philosophical comment might be amended thus: "All kinds of stocks go up. The question is whether Twitter is worth $10 billion, $20 billion or $40 billion."
So can Twitter, a company without a single profitable quarter to its name and with projected 2014 revenue of about $1 billion, really be worth $24 billion? That's 24 times revenue, more than double the 11.5 times projected 2014 revenue at which Facebook is trading. The answer to the question is yes, and there is much more reason to believe Twitter has rampant growth ahead of it than Facebook .
Twitter is at an earlier stage of its development than Facebook. The latter chose an advertising-driven business model in 2008, while Twitter only started selling ads in 2010. Facebook's model is already mature, while Twitter's has more potential upside. That alone, however, would not be enough for the dramatically higher price-to-sales ratio.
Twitter also has second mover advantage. It has had the benefit of watching Facebook and LinkedIn as they blazed the trail, allowing Twitter to improve on their experiences. The IPO was a perfect example: Twitter has managed to avoid Facebook's mistakes. After Facebook's bungled placement, Mark Cuban was saying "goodbye to the individual investor on Wall Street." Everybody, however, is happy with Twitter.
In its core business, too, Twitter is making adjustments that potentially allow it to do better than Facebook, albeit on a smaller scale. Here are a few examples:
– If mobile platforms are the future, Twitter has a better grasp of them. Facebook's share of revenue from mobile advertising reached 49 percent in the third quarter of 2013. Twitter's was 70 percent, even though the company only started offering mobile products in February, 2012.
– Twitter's ad sales model is potentially more attractive to advertisers because it offers a better response quality. Facebook still sells views and clicks. Twitter doesn't: It gets paid for engagement, measured as the sum of retweets, responses and mentions. For Twitter to make money, the user – or customer, from an advertiser's point of view – has to make meaningful contact with the brand, not just see an ad or click on it by mistake. Surely that is the model of the future because it allows an advertiser more control over the budget and the outcome.
– Twitter's cost structure speaks of a more innovative, less bureaucratic organization than the other publicly traded social networks. Research and development accounted for 36 percent of Twitter's third quarter costs compared with 27-28 percent for its rivals. General and administrative expenses – mostly the salaries of lawyers, human resources staff, support personnel, and so on – make up 10 percent of Twitter's expenses and 14-15 percent of Facebook's and LinkedIn's.
All these are clear, quantifiable indicators of the upside for which investors pay a premium. They cannot, of course, alter the fact that believers in Twitter are buying a story about the future that will not necessarily come true. But then so are investors in Facebook and LinkedIn: their multiples are equally inexplicable to a conservative investor like Buffett.
Still, having their heads in the clouds by Buffett's exacting standards does not prevent tech investors from making lots of money, and it is a good thing they are. Their enthusiasm has allowed companies such as Facebook and Twitter to raise enough money to invest heavily in R&D, which benefits a much broader community than Wall Street – all of us rank-and-file users, who take new features and services for granted.
(Leonid Bershidsky, an editor and novelist, is a Bloomberg View contributor. Follow him on Twitter.)