Could Twitter really be worth $US1 billion?

The internet is abuzz with rumours that micro-blogging site Twitter is in the process of raising another $US50 million which could value the company at $US1 billion – despite the fact it is yet to turn a dollar in revenue.

Influential blog Tech Crunch is reporting that Twitter is in the process of completing a capital raising, with New York-based venture capital firm Insight Venture Partners thought to be the lead investor.

The blog says Twitter has raised $US55 million to date, including a funding round of more than $US35 million earlier this year, at which time the company was valued at $US250 million. But now it appears that valuing has quadrupled in the space of about four months.

It would be hard for many hard-working entrepreneurs to believe that a company with no revenue – and no firm model for even generating revenue – could be worth $US1 billion and it’s no surprise that the valuation is being hotly debated this morning.

CNet blogger Don Reisinger has rightly expressed skepticism, pointing out that valuations can change as quickly as economic conditions, and valuing Twitter is difficult given how little is known about the company’s revenue model, other than statements from founder Biz Stone that the company will look at making corporate users pay for their accounts.

“But just how those paid accounts will impact Twitter’s growing user base is up for debate. Will companies go elsewhere to promote their brands? Will they pay Twitter’s fees? All that can impact the company’s real value.”

The Wall Street Journal‘s deals blogger Michael Corkery has spoken to Anant Sundaram, a finance professor and valuation guru at Dartmouth’s Tuck School of Business, who has done some quick back-of-the-envelope calculations based on the theory that Twitter could have 250 million users by 2013, or about 10 times the user base it is expected to have by the end of 2009.

“The $1 billion valuation also may assume that Twitter could throw off about $2 in annual revenue per user, for a total of $US500 million revenue in 2013. He then applied a set of Google’s multiples to Twitter. Like Google, Twitter could prove to be a low-cost, high-margin business with a huge user base,” Corkery writes.

“Extrapolating from Google’s 27% profit margin would give Twitter about $135 million of profit four years from now. Applying Google’s forward price-to-earnings multiple of about 20, that reaches a value of about $US2.7 billion. Sundaram then applied an approximately 20% discount rate, which Corkery says is “toward the high end of the range for discounts often applied to small, risky, high-growth companies. That produces a current value of about $US1.3 billion.”