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A typical P/E ratio is around 13. Take Apple, smack on 13. If it is too high, you're spending too much. No official numbers for Twitter's profits, all guesses,

A typical P/E ratio is around 13. Take Apple, smack on 13. If it is too high, you're spending too much. No official numbers for Twitter's profits, all guesses, but a suggested $116M profit this year gives a current P/E of 207. That means it would take 207 years, ignoring inflation (which would make it much worse) for the company to actually pay its investors/owners back the price of the company. This is why people are suggesting going short. It is clearly over valued. The $26 initial valuation was more reasonable, if you assume the market information is wrong, and that Twitter will generate a far higher profit in the future. Your valuation is a bet on the market being wrong and Twitter's mobile potential being stellar.

fennecfoxen 13y ago
A P/E of 207 could also be expressed as 1/207 = 0.48% rate of return on your investment. That's easier to compare to inflation, and to your bank account. :P Of course, your bank account doesn't have much opportunity to grow its business, and Twitter doesn't have FDIC insurance. More generally, the value of a company is the sum of all its anticipated profits for all time... discounted for inflation, risk, and the time value of money. (The first two of those discounts are obvious; the "time value of money" is just the fact that it's better to have $50 now than an inflation-adjusted $50 in 30 years because you could do something with the money now, like invest in other companies or invest in bonds or invest in re-insulating your basement to save on heating.)
bcoates 13y ago
The P/E doesn't mean it's overvalued, it means it's priced assuming substantial growth in earnings. That doesn't make either the forward-looking market price or the backwards-looking profit numbers wrong. If that growth is unlikely to happen, then it's overvalued. If Twitter becomes quadruple-Facebook and is earning $2.5 billion/year in a few years, it's very undervalued.

fennecfoxen 13y ago

A P/E of 207 could also be expressed as 1/207 = 0.48% rate of return on your investment. That's easier to compare to inflation, and to your bank account. :P Of course, your bank account doesn't have much opportunity to grow its business, and Twitter doesn't have FDIC insurance. More generally, the value of a company is the sum of all its anticipated profits for all time... discounted for inflation, risk, and the time value of money. (The first two of those discounts are obvious; the "time value of money" is just the fact that it's better to have $50 now than an inflation-adjusted $50 in 30 years because you could do something with the money now, like invest in other companies or invest in bonds or invest in re-insulating your basement to save on heating.)

bcoates 13y ago

The P/E doesn't mean it's overvalued, it means it's priced assuming substantial growth in earnings. That doesn't make either the forward-looking market price or the backwards-looking profit numbers wrong. If that growth is unlikely to happen, then it's overvalued. If Twitter becomes quadruple-Facebook and is earning $2.5 billion/year in a few years, it's very undervalued.