Twitter Valued at a Billion Despite Lack of Revenue

Sept. 26, 2009— -- Tweeting has become a daily obsession. For some, using the site is even a minute-by-minute fixation. Updating every move they make, even with picture and video, one can constantly be connected with the rest of the world through the popular Twitter site. It has literally transformed social networking 140 characters at a time.

Celebrities such as basketball star Shaquille O'Neal, country music star Taylor Swift and Disney starlet Miley Cyrus tweet daily. Last month actor Ashton Kutcher attracted over 3 million hits when he uploaded a bikini back shot of his wife, Demi Moore, to his page. Congressman Joe Wilson defended himself through his tweets after his outburst during President Obama's health care speech earlier this month.

With prominent users and so many people invested in the site, how much is Twitter really worth?

With just 60 employees and no advertisers or annual fees to be a member, Twitter is now valued at a billion. Could this be true or is this the latest example of Wall Street pouring investors' money into a virtual sinkhole?

Aswath Damodaran, a professor of Science at New York University's Stern School of Business, helps break down the billion-dollar question. "They've got 30 million members. Roughly speaking, a company with a value of a billion [dollars] has to make about $100 million in earnings a year in terms of profit. With the 30 million members, that works out to $3.33 a member per year. So the question I would have for a Twitter member: Would you pay a $5 to $10 as an annual fee to be a member of Twitter? If the answer is yes, you've just shown me that the company could be worth a billion."

No Revenue, No Profits, but Worth a Billion?

This theory only works if Twitter became a business, a move not yet taken by the company. Facebook, however, started to include advertisements that brought in revenue, and with 500 million users, it is valued at $6 billion.

David Vise, author of "The Google Story," doesn't believe Twitter is worth anything and thinks Wall Street is just getting its appetite back.

"You could say it's a sign of the times. Only in America can a company that makes no revenue or no profits be valued at one billion dollars," he says. "As people get all caught up in all of the excitement, they sometimes suspend rational thinking."

For now, Twitter is asking investors to put another hundred-million dollars into the company, a risk that at this time is hard to tell will fail or succeed.