Is Twitter really worth over $4 billion? J.P. Morgan Chase may be betting clients' money that it is potentially worth much more.
After all, that is the approximate valuation at which the bank's new digital growth fund may take a minority stake in Twitter. For such a bet to work out, though, Twitter will have to secure a higher value later. If it does, it may not be because the business merits it.
Unlike other hot Internet companies, such as Facebook, Groupon and Zynga, Twitter is still struggling to establish a lucrative business model. Lately, it has had success selling advertisers placement on its list of trending topics on the site—for as much as $120,000 a day, estimates Debra Williamson of eMarketer. Even so, Ms. Williamson estimates Twitter will generate just $150 million in revenue in 2011. Compare that to Facebook's $4 billion.
And much of the demand for Twitter advertising may be experimentation. It isn't clear yet what kind of return advertisers can expect to generate. Twitter reaches far fewer users than most realize. The site boasts over 200 million registered accounts, but after excluding inactive, duplicate and nonhuman accounts, the number of monthly users is just 16 million in the U.S., says eMarketer. There are many users internationally, of course, but advertisers aren't willing to pay as much to reach these users.
The best hope for J.P. Morgan's fund may be if Twitter is acquired. Google and Facebook may be interested. Facebook's popular status updates are threatened by Twitter. And Google trails badly in social media. Investing in hot stocks during a bubble is always dangerous—more so when the company's business model is so airy.
Write to Rolfe Winkler at email@example.com