Bet on Royal Mail, not Twitter

Royal Mail delivers to 29 million UK addresses; last year it generated £9 billion of revenues, of which £324 million remained as profit before tax; and it is likely to be valued at £3 billion in its privatisation share sale, indicating a price-earnings ratio modestly below ten.

Twitter — the microblogging phenomenon beloved of self-admiring celebs, but now so ubiquitous as a mode of communication that it is compulsory for British ambassadors abroad — has 200 million users and is expected to generate revenues of just £365 million this year, maybe twice that next year. Twitter says it’s profitable but has so far kept its accounts private, and is nevertheless likely to be valued at £6 billion-plus in its forthcoming flotation. Its ratio of price to revenues (rather than price to earnings, which can’t be calculated without seeing the accounts) will thus be 60 times that of Royal Mail — but apparently looks conservative to seasoned punters in digital offerings.

To give you a little more perspective, the social network LinkedIn has a market value of £18 billion and trades on a price-earnings ratio north of 900. And Facebook, whose shares plunged after it came to market last year but have climbed back, is worth four LinkedIns but only a third of a Google; it currently trades at 200 times earnings.

That’s quite enough numbers for one column, but what it shows us is that the pricing of digital stocks is bonkers, based as it is on finger-in-the-air projections of growth in user numbers and revenues, and ignoring the probability, illuminated by Myspace and Bebo, that what’s hot today will be wiped out by what’s new tomorrow. It is commonly said that if Facebook’s billion users were a country, it would rank just behind China and India.