Twitter Inc.'s (NYSE: TWTR) initial public offering this week couldn't come at a better time for investor interest in social media. With the Global X Social Media Index ETF (NYSE: SOCL) trading up more than 50% since January, investors have been very bullish on the social media space, characterized by high-growth, consumer-facing technology companies. And, the micro-blogging network's IPO could provide a further boost to these valuations over time.

Tremendous Interest in Twitter's IPO

Twitter's IPO began trading on Thursday, November 7, 2013 with investors asking for 30 times the number of shares that were on offer, according to Reuters. With its $14.4 billion offering, including likely overallotments, the company's public offering will become the second largest Internet offering in the U.S. after Facebook Inc.'s (NASDAQ: FB) $16 billion IPO last year and ahead of Google Inc.'s (NASDAQ: GOOG) IPO back in 2004.

Analysts have also been very bullish on the newly minted company's stock, with 12-month price targets ranging from $29.00 to $54.00 per share, compared to its $26.00 offering price. According to Morningstar's Rick Summer in a research note published late last week, "Twitter has only just begun to turn on its monetization engine for more than 230 million monthly active users," which could suggest significant potential upside over the long-term.

Twitter Could Boost Valuations

Twitter reported revenues that grew from $28.3 million in FY 2010 to $316.9 million in FY 2012, with a net loss that expanded from $(67.3) million to $(79.4) million, in its S-1 filing with the SEC back on October 3, 2013. The loss comes on the heels of a significant increase in research and development and sales and marketing, as opposed to selling, general and administrative expenses, which suggests that the firm is intentionally operating at a loss to reinvest in growth.

With a market capitalization of around $18 billion at $26.00 per share, the company is valuing itself at roughly 56x its trailing revenues. This figure is significantly higher than many other social media stocks that average a price-to-sales ratio of around 6.7x (Facebook's price-to-sales ratio stands at an above-average 18.8x). In the end, Twitter?s higher valuation could end up increasing the valuations seen at many other social media stocks.

Looking for Value in Social Media

Investors looking for the best value in social media may want to shy away from the headlines and look towards micro- and small-cap stocks in the space. Many of these companies are trading well below their industry peers, since they do not share the same level of publicity or exposure to institutional investors. But over time, these growing companies could eventually up-list to the NASDAQ or NYSE to improve their exposure and unlock real value for their shareholders.

CrowdGather Inc. (OTCQB: CRWG) is a great example of a micro-cap stock in the social media space that appears significantly undervalued with a market capitalization of just $5.8 million. With over 20 million registered users on its network, the company created and maintains one of the largest networks of forum communities on the Internet.

The company's discount is very apparent in its price-to-book ratio of just 0.3x, suggesting that the stock is trading at less than its liquidation value, while its price-to-sales ratio remains at a modest 2.7x compared to Facebook's 18.8x or Twitter?s 56x figure. If adjusted to the industry average multiple of 6.7x price-to-sales, CrowdGather's shares would be priced at $0.20, while a "fair value" price-book ratio of 1.0x would equate to a share price of approximately $0.25 per share.

While most investors are looking towards large social media stocks like Twitter and Facebook, value investors may want to look towards smaller companies like CrowdGather Inc. Increasing valuations in the social media space could help companies like these close their valuation discounts and ultimately unlock significant value for shareholders. And to put the two companies into perspective, CrowdGather's entire market capitalization is equivalent to a move of less than $0.01 per share in Twitter's stock, which now trades at about $46.00 per share, or $26 billion, above its IPO price of $26.00 per share, or $16 billion.

More Information

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