Twitter Inc: (NYSE)

Morningstar Equity Research
Twitter Inc TWTR (NYSE) | QQQ

Last Price Fair Value Consider Buy Consider Sell Uncertainty Economic Moat™ Moat Trend™ Stewardship Industry Group
38.49 USD 36.00 USD 21.60 USD 55.80 USD High Narrow Positive Standard Online Media
We believe Twitter will develop its content partnerships and Vital Statistics
increase its ad revenue per user. Market Cap (USD Mil) 24,935
Updated Forecasts and Estimates from 28 Apr 2015 52-Week High (USD) 55.99
52-Week Low (USD) 29.51
Rick Summer Investment Thesis 09 Feb 2015 52-Week Total Return % -9.7
Strategist
YTD Total Return % 7.3
rick.summer@morningstar.com Twitter and its users benefit from the network effects typical of a
+1 (312) 696-6267 Last Fiscal Year End 31 Dec 2014
broad content distribution platform. The company counts 288
5-Yr Forward Revenue CAGR % 41.7
million monthly active users, an impressive number for a media
5-Yr Forward EPS CAGR % 71.4
platform that has captured both attention and budgets from
Price/Fair Value 1.07
advertisers. Engagement with the Twitter platform is naturally
The primary analyst covering this company Valuation Summary and Forecasts
social, reinforcing the desire to share and react to information in
does not own its stock. Fiscal Year: 2013 2014 2015(E) 2016(E)
real time. The company would argue that it is the largest "real-time" Price/Earnings NM 256.2 81.9 46.4
Research as of 29 Apr 2015 social network in the world, and we would agree. EV/EBITDA NM 69.9 43.1 26.8
Estimates as of 28 Apr 2015 EV/EBIT NM NM NM 219.4
Pricing data through 29 Apr 2015
Rating updated as of 29 Apr 2015 There are many self-selected groups within Twitter, connected by Free Cash Flow Yield % -0.2 -0.5 1.1 1.4
Dividend Yield % — — — —
interests. Users may follow celebrities (for example, One Direction
Currency amounts expressed with "$" are in
U.S. dollars (USD) unless otherwise denoted. and LeBron James), work interests (for example, human capital),
and local interests (for example, Chicago events or breaking news). Financial Summary and Forecasts (USD Mil)
Fiscal Year: 2013 2014 2015(E) 2016(E)
Each user's experience is highly personalized, based on how users
Revenue 665 1,403 2,221 3,482
create their networks, interact with the content, and post their own
Revenue YoY % 109.8 111.0 58.3 56.8
content. Twitter is building a unique and proprietary customer data
Contents EBIT -636 -539 -578 104
set.
EBIT YoY % 724.9 -15.3 7.2 -118.1
Investment Thesis 1 Net Income, Adjusted -45 101 334 592
In our view, the most important growth levers for Twitter are market Net Income YoY % -43.4 -324.8 230.1 77.5
Morningstar Analysis
2
share, users, and time spent. Perhaps the most important aspect Diluted EPS -0.24 0.14 0.47 0.83
Analyst Note
Valuation, Growth and Profitability 2 supporting our positive view on growth is the complementary Diluted EPS YoY % -64.9 -160.1 230.1 77.5
Scenario Analysis 3 nature of Twitter to traditional content and media. This will allow Free Cash Flow -708 -877 -369 -137
Economic Moat 3 Twitter to more cheaply acquire content that flows through its Free Cash Flow YoY % 582.2 24.0 -57.9 -62.8
Moat Trend 3 media platform. Historical/forecast data sources are Morningstar Estimates and may reflect adjustments.
Bulls Say/Bears Say 5
Financial Health 6 Still, growth in users has been slowing. Furthermore, the company
Enterprise Risk 6 Profile
is competing for advertising dollars with juggernauts such as
Management & Ownership 7
Facebook and Google. Last, as advertisers may struggle to measure Twitter is an Internet platform that individuals and companies use to post
Analyst Note Archive 8
the success of ad campaigns, the company may struggle to attract short messages (a maximum of 140 characters) that are publicly visible. The
Additional Information -
new ad dollars. company counts more than 288 million monthly active users. Individuals
Morningstar Analyst Forecasts 10 tend to self-organize based on topics of interest (for example, finance or
Comparable Company Analysis 14 sports) and form a loose social network. Advertising generates
16
Still, we believe the marketing data that Twitter is gathering approximately 90% of revenue. The service is mostly known for its real-time
Methodology for Valuing Companies
through the proprietary interest graph will piggyback on the content.
momentum created by Facebook. As advertisers have continued
shifting spending to online media, large tranches have remained
offline--particularly in TV advertising--because of traditional
considerations, including brand-building objectives and broad
reach.
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disclosures at the end of this report.

Morningstar Analysis
Twitter's First Quarter Disappoints; We Urge Caution in our opinion. We are less convinced that a strategy selling
Over Optimism as We Cut Our Fair Value to $36 29 Apr 2015 ads to logged out users will improve Twitter's scalability as
Twitter posted disappointing first-quarter results, reporting an ad platform.
revenue below our forecast. As we consider the potential
for Twitter to cross over into a mass-market media platform, We believe the company's focus on improving the user
coupled with management's updated guidance, we are experience for logged out users is prudent, but this
cutting our fair value estimate to $36 and sticking with our execution will only be successful if users eventually decide
narrow moat rating. Although we still recognize the to log in, in our view. Twitter will have greater difficulty in
potential for upside to both the business and the stock price targeting advertising to generic users. Our thesis for social
(provided the company can reinvigorate the growth of advertising platforms depends on the ability of the platform
logged-in users), we don't believe the risk/reward tradeoff 1) to provide unique and highly targeted advertising
is appropriate for investors to consider allocating new capabilities, and 2) to offer a scalable audience for the
money today, and consider the shares overvalued. targeted advertising. At only 302 MAUs, Twitter's user base
of logged in users is a fraction of targeted platforms such
Total company revenue grew 74% versus 2014 to $436 as Facebook and Google. As the company tries to target
million (80% on a constant currency basis), below our traffic for users that aren't logged in, we still place less
estimates. We were overly optimistic about advertising value in that traffic, because Twitter may know very little
revenues, but users (302 million monthly active users, or about those particular users to improve its user database
MAUs) came in as expected. Management blamed and deliver personalized ads.
weakness in sales of direct response ads (as opposed to
branded ads), particularly calling out advertisers that were Valuation, Growth and Profitability 29 Apr 2015
unwilling pay higher prices that were required to win We are reducing our fair value estimate to $36 from $43 to
auctions. The company suggests that ad pricing discipline account for lower user and revenue growth in 2015, and
ultimately will drive higher revenues as advertisers learn lower total reach throughout our forecast period.
their true ROI, an assertion that we generally support.
However, we are more concerned that Twitter's lack of scale In our base-case scenario, several growth levers contribute
(which we estimate as less than 120 million daily users, or to revenue and cash flow growth, and although the firm
DAUs) may prove to be a limiting factor as it competes for achieves meaningful growth in users, Twitter's network
ad budgets with firms like Facebook and Google. Facebook, reaches about half of Facebook's user base. In this model,
by comparison, had 936 million DAUs in the first quarter. MAUs grow at a 13% compound annual growth rate through
2024. Additionally, ad revenue per user grows at a 11%
The company has guided to lower growth in MAUs in the CAGR to more than $13 per year. We also consider different
second quarter, and management has said there is no usage levels within the user base. In the base case, heavy
visibility about growth for the remainder of 2015. We expect users contribute $21 per year and casual users contribute
the company to end 2015 with approximately 338 million only $5 per year. Total company revenue reaches $13 billion
MAUs, representing a growth rate of 17% versus 2014. We in 2024, while operating margins exceed 28%. Returns on
still believe the company can reaccelerate growth in 2016, invested capital approach 20% at the end of our forecast
but that will require successful execution of partnerships, period. Based on our 10-year discounted cash flow model,
content syndication strategies, and better user experience, this scenario yields a $36 fair value estimate.

differentiated "one to one," "many to one," and "one to

many" media platform. Twitter's unique customer data
would have even greater value when combined with data
from Facebook or Google, in our view. Furthermore, both of
these firms would find a high degree of synergy and would
probably eliminate the bulk of Twitter's existing sales and
marketing infrastructure to support advertising revenue. Of
course, Facebook and Google would not be the only firms
to place a high economic value on Twitter, but we believe
these two provide the most logical fit. In the event that
Twitter is unable to acquire a mass market beyond its early
adopters, the company would be acquired. Based on our
10-year DCF model, this scenario results in a $26 fair value
estimate.
Economic Moat
Scenario Analysis Twitter's narrow economic moat is built on several

In our bull-case scenario, we expect the company to achieve important characteristics: reach, network effects, and
a reach similar to Facebook's, although our model does not unique customer data. Twitter and its users benefit from the
explicitly consider time spent on the service. In this model, network effects typical of a broad content distribution
MAUs grow at a 18% CAGR through 2024. Additionally, ad platform. The company counts 302 million monthly active
revenue per user grows at a 17% CAGR. We consider users, an impressive number for a media platform that has
different usage levels within the user base. In our bull case, captured both attention and budgets from advertisers.
heavy users contribute $28 per year while casual users During the fourth quarter of 2014, Twitter also reported more
contribute only $5 per year. Total company revenue exceeds than 180 billion "timeline views," growing 23% versus the
$31 billion in 2023, while operating margins reach 29%. prior year. Timeline views are Twitter's metric for reporting
ROICs are approximately 26% at the end of our forecast engagement, a measure of the frequency at which users are
period. Based on our 10-year DCF model, this scenario reading tweets (messages). This level of engagement is
results in a $70 fair value estimate. likely to be misunderstood, in our view, as competitors are
frequently reporting other measures of engagement. Taken
Our bear-case scenario is a key component of both our at face value, Twitter's reach alone is insufficient, in our
investment thesis and valuation. We believe Twitter has view, to create massive competitive advantages today and
built assets that are competitively differentiated and thereby offer support for a wide moat. For example, in the
durable, even if it is unable to translate its platform into a United States, companies such as Yahoo (narrow moat),
mass-market social network. While we have highlighted the Google (wide moat), and Facebook (wide moat) have much
lack of reach that may ultimately plague the company in our greater reach, both for desktop and mobile users.
downside scenario, we believe that other companies,
namely Facebook and Google, would find value in the highly Moat Trend
Twitter's positive moat trend is based on the increasing

importance of the media distribution platform and its

growing insights about its users, which should help support
its unique value proposition. Twitter's interest graph forms
a unique and proprietary database of user data, supporting
the company's moat. While Facebook claims to own the
"social graph," Twitter’s social network is forming the
"interest graph" of its users. In conversations with users,
individuals say Twitter provides unique connections to
celebrities (for example, Katy Perry has more than 44 million
followers), politicians (President Obama has more than 38
million followers), brands (comedy website Funny or Die has
more than 6 million followers), sports (the NFL has more
than 5 million followers), and pundits (venture capitalist Fred
Wilson has more than 250,000 followers). Users can tailor
their timeline and create lists based on their interests.
Individuals can also interact with tweets, including through
replies, "retweets," "favorites," "following," or forwarding
on to an individual by e-mail, outside the Twitter ecosystem.
Each of these actions represents a different level of
engagement, generating additional data for the Twitter
customer database. We believe advertisers will be able to
successfully target branding and direct-response
campaigns on Twitter better than most competitive
platforms.

Bulls Say/Bears Say
Bulls Say Bears Say

3 Twitter's ad revenue per user continues to grow, 3 Twitter's growth in MAUs is slowing, indicating that
surpassing other social networking companies, the market could be reaching a level of maturity.
including LinkedIn.
3 Twitter's user base is significantly smaller than those
3 The company recently agreed to a commercial deal of companies such as Google, Facebook, and Yahoo,
with the National Football League to distribute and some advertisers require massive reach before
proprietary content (short replays) to Twitter users, allocating budget to a digital platform.
demonstrating the importance of Twitter to partner
companies. 3 Twitter is highly dependent on one advertising
product, and new advertising could turn users away
3 If Twitter is able to attain a similar user base to from the service.
Facebook, the upside opportunity versus our current
view is meaningful.

Five Year Adjusted Cash Flow Forecast (USD Mil) Financial Health
Twitter's balance sheet is solid, holding approximately $2
2015(E) 2016(E) 2017(E) 2018(E) 2019(E)
Cash and Equivalents (beginning of period) 1,511 1,113 957 1,116 1,489 billion of net cash. We expect the company to invest heavily
Adjusted Available Cash Flow 334 426 532 738 1,070 in sales and marketing, product development, and capital
Total Cash Available before Debt Service 1,845 1,539 1,489 1,854 2,559
expenditures, resulting in negative free cash flow until 2015.
Principal Payments — — — — — Although the operating model is unproved thus far, we
Interest Payments -60 -60 -60 -60 -60
Other Cash Obligations and Commitments — — — — —
expect the company to eventually translate 15% of sales
Total Cash Obligations and Commitments -60 -60 -60 -60 -60 into free cash flow.
Cumulative Annual Cash Flow Cushion

Enterprise Risk
Cash Flow Cushion
Possible Liquidity Need The biggest risk to our investment thesis is that the growth
potential has saturated, and Twitter never grows into the
mainstream Internet population. As a niche product,
advertisers are unlikely to dedicate a large percentage of
their advertising budgets to the platform. Additionally, the
company must successfully launch new advertising
products in order to increase ad revenue per user, translating
Adjusted Cash Flow Summary into top-line sales and bottom-line cash flows. Ultimately,
% of
USD Millions Commitments the operating model has not been proved, so our operating
Beginning Cash Balance 1,511 505.3 margin assumptions may prove unattainable as well.
Sum of 5-Year Adjusted Free Cash Flow 3,100 1,036.9
Sum of Cash and 5-Year Cash Generation 4,611 1,542.2
Revolver Availability — —
Asset Adjusted Borrowings (Repayment) — —
Sum of Cash, 5-Year Cash Generation, Revolver and Adjustments 4,611 1,542.2
Sum of 5-Year Cash Commitments -299 —

Management & Ownership

Management 09 Feb 2015
Management Activity Dick Costolo has served as CEO since October 2010, having
worked at the firm since 2009. Before joining Twitter,
Name Position Shares Held Report Date* InsiderActivity Costolo ran several startup technology companies, including
MR. EVAN WILLIAMS Director 2,904,922 13 Apr 2015 3,186,752
a company that was sold to Google, where he then worked
MR. EVAN WILLIAMS Director 2,904,922 13 Apr 2015 3,186,752
MR. ANTHONY NOTO CFO 1,373,263 04 Mar 2015 —
for a couple of years. The management team consists of
MR. ALEXANDER Senior VP, Divisional 1,002,154 07 Apr 2015 60,175 several nonfounders, including Anthony Noto as CFO and
ROETTER
MR. MIKE GUPTA Senior VP, Divisional 967,162 02 Sep 2014 —
Adam Bain (from News Corporation) as president of global
MR. RICHARD COSTOLO CEO/Director,Director 818,608 03 Feb 2015 125,000 revenue.
MS. VIJAYA GADDE General Counsel/Secretary 734,497 03 Mar 2015 37,475
MR. ADAM BAIN President, Divisional 532,985 03 Feb 2015 39,020
This management team has been credited with improving
the infrastructure and technology powering the Twitter
*Represents the date on which the owner’s name, position, and common shares held were reported by the holder or issuer.
application, as well as delivering new advertising products
and scaling revenue growth. We believe its interests are
Fund Ownership aligned with shareholders', although we acknowledge that
% of Shares % of Fund Change
Top Owners Held Assets (k) Portfolio Date Twitter's limited operating history and lack of history as a
Vanguard Total Stock Mkt Idx 1.38 0.11 102 31 Mar 2015 public company provide little evidence. Still, we are
Harbor Capital Appreciation Fund 1.16 1.43 449 31 Mar 2015 encouraged that, unlike other high-profile initial public
Fidelity® Growth Company Fund 1.14 0.80 3,993 28 Feb 2015
offerings, this company has not used a dual-class structure
T. Rowe Price Growth Stock Fund 0.97 0.70 6,277 31 Mar 2015
Columbia Select Large Cap Growth Fund 0.95 4.15 — 28 Feb 2015 for its common shares.
Concentrated Holders
Renaissance IPO ETF 0.01 8.49 — 28 Apr 2015

Berkshire Focus Fund 0.01 6.95 3 31 Mar 2015
Interfund Equity USA Advantage 0.08 5.90 -6 31 Mar 2015
Fideuram Fund Equity USA Advantage 0.06 5.90 8 31 Mar 2015
Merchbanc Global PP — 5.28 -8 31 Mar 2015
Institutional Transactions
Shares
% of Shares % of Fund Bought/
Top 5 Buyers Held Assets Sold (k) Portfolio Date
T. Rowe Price Associates, Inc. 2.20 0.11 10,304 31 Dec 2014
RTLC Management, LLC 1.14 — 7,304 31 Dec 2014
BlackRock Advisors LLC 1.16 0.27 6,893 31 Dec 2014
Columbia Mangmt Investment Advisers, LLC 2.28 0.34 6,445 31 Dec 2014
NORGES BANK 0.50 0.06 3,081 31 Dec 2014
Top 5 Sellers
Spark Management Partners II, LLC 0.01 — -32,364 31 Dec 2014

Benchmark Capital Management Co. VI, L.L.C. 2.69 — -14,261 31 Dec 2014
J.P. Morgan Investment Management Inc. 0.64 0.06 -8,606 31 Dec 2014
Winslow Capital Management, LLC 0.71 0.51 -4,633 31 Dec 2014
Andor Capital Management LLC 0.39 5.71 -3,250 31 Dec 2014

Analyst Notes
Twitter's First Quarter Disappoints; We Urge Caution content syndication strategies, and better user experience,
Over Optimism as We Cut Our Fair Value to $36 29 Apr 2015 in our opinion. We are less convinced that a strategy selling
Twitter posted disappointing first-quarter results, reporting ads to logged out users will improve Twitter's scalability as
revenue below our forecast. As we consider the potential an ad platform.
for Twitter to cross over into a mass-market media platform,
coupled with management's updated guidance, we are We believe the company's focus on improving the user
cutting our fair value estimate to $36 and sticking with our experience for logged out users is prudent, but this
narrow moat rating. Although we still recognize the execution will only be successful if users eventually decide
potential for upside to both the business and the stock price to log in, in our view. Twitter will have greater difficulty in
(provided the company can reinvigorate the growth of targeting advertising to generic users. Our thesis for social
logged-in users), we don't believe the risk/reward tradeoff advertising platforms depends on the ability of the platform
is appropriate for investors to consider allocating new 1) to provide unique and highly targeted advertising
money today, and consider the shares overvalued. capabilities, and 2) to offer a scalable audience for the
targeted advertising. At only 302 MAUs, Twitter's user base
Total company revenue grew 74% versus 2014 to $436 of logged in users is a fraction of targeted platforms such
million (80% on a constant currency basis), below our as Facebook and Google. As the company tries to target
estimates. We were overly optimistic about advertising traffic for users that aren't logged in, we still place less
revenues, but users (302 million monthly active users, or value in that traffic, because Twitter may know very little
MAUs) came in as expected. Management blamed about those particular users to improve its user database
weakness in sales of direct response ads (as opposed to and deliver personalized ads.
branded ads), particularly calling out advertisers that were
unwilling pay higher prices that were required to win After Posting a Strong Quarter, We Still See Risk of a
auctions. The company suggests that ad pricing discipline Slowdown in Twitter's User Growth 06 Feb 2015
ultimately will drive higher revenues as advertisers learn Twitter's fourth-quarter results benefited from continued
their true ROI, an assertion that we generally support. growth in advertiser demand, although, based on slowing
However, we are more concerned that Twitter's lack of scale user growth, we remain cautious about the company's
(which we estimate as less than 120 million daily users, or ability to achieve the same mass-market penetration of
DAUs) may prove to be a limiting factor as it competes for large Internet companies such as Google, Facebook, or
ad budgets with firms like Facebook and Google. Facebook, Yahoo. Regardless, we were encouraged by the firm's
by comparison, had 936 million DAUs in the first quarter. revenue growth and continue to believe the company has a
unique ability to target its users on a "real-time" basis, and
The company has guided to lower growth in MAUs in the we reiterate its narrow moat rating. Additionally, we may
second quarter, and management has said there is no have a very modest increase in our fair value estimate, which
visibility about growth for the remainder of 2015. We expect currently stands at $40.
the company to end 2015 with approximately 338 million
MAUs, representing a growth rate of 17% versus 2014. We Continued deceleration of growth in monthly active users
still believe the company can reaccelerate growth in 2016, (MAUs) is not altogether troubling, but it ultimately places
but that will require successful execution of partnerships, an upper bound to our thesis. If Twitter users grow faster

Analyst Notes
than our current forecast, we believe our valuation (and cash flows beginning in 2015. The current financials mask
moat rating) may prove to be too conservative. We believe the cash flow generating potential for the company, but we
advertisers are attracted to 1) massive reach, which at prefer to highlight that the stock does not provide an
Internet scale, equates to nearly a billion users, and 2) appropriate margin of safety at these levels.
unique targeting capabilities. We still question Twitter's
ability to reach the scale of the Internet giants.
MAUs reached 288 million, growing approximately 20%

versus 2013 and 1.4% sequentially. As compared with
Facebook's MAUs of 1.3 billion, Twitter's reach pales in
comparison. Furthermore, we estimate Facebook's daily
reach is more than 7 times that of Twitter. Management is
clearly aware of the need to grow its user base, and the
company has struck several deals in the past week in order
to address user growth, in our view. (We note that these
deals are likely to have the ancillary effect of growing near-
term revenue as well.) Notably, the company signed a deal
with Google, allowing the search giant to index Twitter
content, a relationship that previously ended in 2011. We
believe the relationship has been reignited at the behest of
Twitter in an attempt to drive traffic and awareness to
Twitter content and ultimately grow its user base.
The company also struck advertising and content

syndication deals with FlipBoard and Yahoo Japan. These
two partners will be able to publish syndicated content (and
ads) from Twitter, driving awareness of the service and
supporting additional reach for advertisers. Still, we note
that advertisers may have greater difficulty directing
targeted campaigns toward a more generic audience (which
Twitter euphemistically refers to as "logged out users").
Revenue grew 97% versus 2013, ahead of our expectations,

while adjusted EBITDA and adjusted net income also came
in ahead of our forecast. These results are impressive,
particularly as user growth lagged our forecast. GAAP
profitability continues to be elusive, and free cash flow was
also negative for the quarter, although we expect positive

Morningstar Analyst Forecasts
Financial Summary and Forecasts

Fiscal Year Ends in December Forecast
3-Year 5-Year
Growth (% YoY) Hist. CAGR 2012 2013 2014 2015 2016 Proj. CAGR
Revenue 136.3 198.1 109.8 111.0 58.3 56.8 41.7
EBIT — -39.5 724.9 -15.3 7.2 -118.1 —
EBITDA — -95.6 11,369.0 -157.3 76.8 61.0 55.5
Net Income — -51.6 -43.4 -324.8 230.1 77.5 71.4
Diluted EPS — -57.7 -64.9 -160.1 230.1 77.5 71.4
Earnings Before Interest, after Tax — -42.8 800.8 -18.9 -27.3 -118.1 —
Free Cash Flow — -34.8 582.2 24.0 -57.9 -62.8 —
3-Year 5-Year
Profitability Hist. Avg 2012 2013 2014 2015 2016 Proj. Avg
Operating Margin % -52.8 -24.3 -95.6 -38.4 -26.0 3.0 6.8

EBITDA Margin % -19.7 -1.4 -79.0 21.5 23.9 24.6 30.7
Net Margin % -8.2 -25.1 -6.8 7.2 15.0 17.0 17.1
Free Cash Flow Margin % -67.2 -32.7 NM -62.5 -16.6 -3.9 -0.6
ROIC % — — — — — — —
Adjusted ROIC % -41.3 -30.9 -99.4 6.3 7.5 37.4 42.2
Return on Assets % -18.0 -10.2 -30.8 -12.9 -7.4 0.9 5.2
Return on Equity % -30.4 -37.6 -36.1 -17.6 -11.8 1.5 8.9
3-Year 5-Year
Leverage Hist. Avg 2012 2013 2014 2015 2016 Proj. Avg
Debt/Capital 0.18 0.16 0.06 0.31 0.33 0.33 0.29

Total Debt/EBITDA — -25.03 -0.38 5.34 3.02 1.88 1.42
EBITDA/Interest Expense -13.66 -2.19 -46.39 7.62 8.89 14.32 27.14
Valuation Summary and Forecasts Discounted Cash Flow Valuation

2013 2014 2015(E) 2016(E) Firm Value Per Share
USD Mil (%) Value
Price/Fair Value 2.45 0.92 — —
Present Value Stage I 4,359 19.0 6.14
Price/Earnings NM 256.2 81.9 46.4
Present Value Stage II 4,959 21.6 6.99
EV/EBITDA NM 69.9 43.1 26.8
Present Value Stage III 13,625 59.4 19.20
EV/EBIT NM NM NM 219.4
Total Firm Value 22,943 100.0 32.34
Free Cash Flow Yield % -0.2 -0.5 1.1 1.4
Dividend Yield % — — — —
Cash and Equivalents 3,622 — 5.10
Debt -1,607 — -2.27
Key Valuation Drivers Preferred Stock — — —
Cost of Equity % 9.0 Other Adjustments — — —
Pre-Tax Cost of Debt % 5.3 Equity Value 24,957 — 35.18
Weighted Average Cost of Capital % 8.7
Long-Run Tax Rate % 35.0 Projected Diluted Shares 709
Stage II EBI Growth Rate % 8.0
Stage II Investment Rate % 10.7 Fair Value per Share (USD) —
Perpetuity Year 15 The data in the table above represent base-case forecasts in the company’s reporting
currency as of the beginning of the current year. Our fair value estimate may differ from the
Additional estimates and scenarios available for download at http://select.morningstar.com. equity value per share shown above due to our time value of money adjustment and in cases
where probability-weighted scenario analysis is performed.

Income Statement (USD Mil)

2012 2013 2014 2015 2016
Revenue 317 665 1,403 2,221 3,482
Cost of Goods Sold 129 267 446 666 975

Gross Profit 188 398 957 1,555 2,507
Selling, General & Administrative Expenses 146 440 804 1,155 1,358
Research & Development 119 594 692 977 1,045
Other Operating Expense (Income) — — — — —
Depreciation & Amortization (if reported separately) — — — — —
Operating Income (ex charges) -77 -636 -539 -578 104
Restructuring & Other Cash Charges — — — — —

Impairment Charges (if reported separately) — — — — —
Other Non-Cash (Income)/Charges — — — — —
Operating Income (incl charges) -77 -636 -539 -578 104
Interest Expense 2 11 39 60 60
Interest Income — — — 16 31
Pre-Tax Income -79 -647 -578 -621 75
Income Tax Expense 0 -2 -1 -217 26
Other After-Tax Cash Gains (Losses) — — — — —

Other After-Tax Non-Cash Gains (Losses) — — — — —
(Minority Interest) — — — — —
(Preferred Dividends) — — — — —
Net Income -79 -645 -578 -404 49
Weighted Average Diluted Shares Outstanding 117 190 709 709 709
Diluted Earnings Per Share -0.68 -3.41 -0.81 -0.57 0.07
Adjusted Net Income -79 -45 101 334 592

Diluted Earnings Per Share (Adjusted) -0.68 -0.24 0.14 0.47 0.83
Dividends Per Common Share — — — — —
EBITDA -5 -525 -331 -161 313

Adjusted EBITDA -5 -525 301 532 856

Balance Sheet (USD Mil)

2012 2013 2014 2015 2016
Cash and Equivalents 203 841 1,511 1,113 957

Investments 222 1,393 2,111 2,111 2,111
Accounts Receivable 112 247 418 639 859
Inventory — — — — —
Deferred Tax Assets (Current) — — — — —
Other Short Term Assets 17 93 216 341 535
Current Assets 554 2,575 4,256 4,205 4,462
Net Property Plant, and Equipment 186 333 557 383 452
Goodwill 69 363 623 623 623
Other Intangibles 4 78 105 105 105
Deferred Tax Assets (Long-Term) — — — — —
Other Long-Term Operating Assets — — — — —
Long-Term Non-Operating Assets 19 18 43 43 43
Total Assets 832 3,366 5,583 5,357 5,684
Accounts Payable 8 28 53 73 107

Short-Term Debt 49 87 112 112 112
Deferred Tax Liabilities (Current) — — — — —
Other Short-Term Liabilities 53 110 228 361 566
Current Liabilities 110 225 394 547 786
Long-Term Debt 66 111 1,495 1,495 1,495

Deferred Tax Liabilities (Long-Term) 12 60 25 25 25
Other Long-Term Operating Liabilities 19 21 43 68 107
Long-Term Non-Operating Liabilities — — — — —
Total Liabilities 207 416 1,957 2,135 2,413
Preferred Stock — — — — —
Common Stock 0 0 0 0 0
Additional Paid-in Capital 974 3,945 5,209 5,209 5,209
Retained Earnings (Deficit) -349 -995 -1,572 -1,976 -1,927
(Treasury Stock) — — — — —
Other Equity -1 0 -10 -10 -10
Shareholder's Equity 624 2,950 3,626 3,223 3,272
Minority Interest — — — — —
Total Equity 624 2,950 3,626 3,223 3,272

Cash Flow (USD Mil)

2012 2013 2014 2015 2016
Net Income -79 -645 -578 -404 49
Depreciation 73 111 208 416 209

Amortization — — — — —
Stock-Based Compensation 26 600 632 693 543
Impairment of Goodwill — — — — —
Impairment of Other Intangibles — — — — —
Deferred Taxes -1 -9 -10 — —
Other Non-Cash Adjustments 8 6 31 — —
(Increase) Decrease in Accounts Receivable -74 -112 -178 -221 -220

(Increase) Decrease in Inventory — — — — —
Change in Other Short-Term Assets -7 -12 -165 -126 -194
Increase (Decrease) in Accounts Payable 3 8 18 20 34
Change in Other Short-Term Liabilities 24 55 123 133 205
Cash From Operations -28 1 82 512 626
(Capital Expenditures) -51 -76 -202 -242 -278

Net (Acquisitions), Asset Sales, and Disposals -2 -44 -165 — —
Net Sales (Purchases) of Investments 102 -1,186 -730 — —
Other Investing Cash Flows — — — 25 39
Cash From Investing 49 -1,306 -1,097 -217 -239
Common Stock Issuance (or Repurchase) 2 2,013 54 — —

Common Stock (Dividends) — — — — —
Short-Term Debt Issuance (or Retirement) — — — — —
Long-Term Debt Issuance (or Retirement) -39 -70 1,639 — —
Other Financing Cash Flows — — -1 -693 -543
Cash From Financing -37 1,942 1,692 -693 -543
Exchange Rates, Discontinued Ops, etc. (net) 0 0 -7 — —

Net Change in Cash -16 638 670 -398 -156

Comparable Company Analysis

These companies are chosen by the analyst and the data are shown by nearest calendar year in descending market capitalization order.
Valuation Analysis
Price/Earnings EV/EBITDA Price/Free Cash Flow Price/Book Price/Sales
Price/Fair
Company/Ticker Value 2014 2015(E) 2016(E) 2014 2015(E) 2016(E) 2014 2015(E) 2016(E) 2014 2015(E) 2016(E) 2014 2015(E) 2016(E)
Google Inc GOOG USA 0.77 19.0 18.2 16.1 13.9 12.6 10.8 31.4 23.9 19.7 3.4 3.1 2.7 5.4 4.9 4.3
Facebook Inc FB USA 0.97 70.3 39.4 30.5 37.9 25.2 18.8 71.1 39.2 28.4 6.0 5.7 5.0 17.4 12.8 10.3
LinkedIn Corp LNKD USA 1.07 113.7 86.9 51.5 56.4 37.8 24.2 NM 80.8 46.1 8.6 9.5 8.5 12.9 10.9 8.7
Average 67.7 48.2 32.7 36.1 25.2 17.9 51.3 48.0 31.4 6.0 6.1 5.4 11.9 9.5 7.8
Twitter Inc TWTR US 1.07 256.2 81.9 46.4 69.9 43.1 26.8 NM 92.3 71.6 6.4 7.7 7.6 16.4 11.2 7.2
Returns Analysis
ROIC % Adjusted ROIC % Return on Equity % Return on Assets % Dividend Yield %
Last Historical Year
Total Assets
Company/Ticker (Mil) 2014 2015(E) 2016(E) 2014 2015(E) 2016(E) 2014 2015(E) 2016(E) 2014 2015(E) 2016(E) 2014 2015(E) 2016(E)
Google Inc GOOG USA 131,133 USD — — — 61.7 51.6 49.0 15.1 14.2 14.2 11.9 11.5 11.7 — — —
Facebook Inc FB USA 40,184 USD — — — 41.1 37.5 61.4 11.5 8.8 12.9 10.2 8.0 11.8 — — —
LinkedIn Corp LNKD USA 5,427 USD 0.7 1.8 7.6 0.8 1.9 7.8 -0.5 2.3 10.1 -0.4 1.4 5.9 — — —
Average 0.7 1.8 7.6 34.5 30.3 39.4 8.7 8.4 12.4 7.2 7.0 9.8 — — —
Twitter Inc TWTR US 5,583 USD — — — 6.3 7.5 37.4 -17.6 -11.8 1.5 -12.9 -7.4 0.9 — — —
Growth Analysis
Revenue Growth % EBIT Growth % EPS Growth % Free Cash Flow Growth % Dividend/Share Growth %
Revenue
Google Inc GOOG USA 66,001 USD 18.9 14.7 14.1 7.1 15.1 17.8 18.9 9.1 12.8 -90.7 909.9 33.7 — — —
Facebook Inc FB USA 12,466 USD 58.4 41.5 23.8 78.1 13.0 54.7 87.3 83.5 29.9 -60.5 497.1 55.7 — — —
LinkedIn Corp LNKD USA 2,219 USD 45.2 32.9 26.0 -24.4 352.9 234.6 25.0 46.7 68.8 NM -136.7 159.4 — — —
Average 40.8 29.7 21.3 20.3 127.0 102.4 43.7 46.4 37.2 -75.6 423.4 82.9 — — —
Twitter Inc TWTR US 1,403 USD 111.0 58.3 56.8 -15.3 7.2 -118.1 -160.1 230.1 77.5 24.0 -57.9 -62.8 — — —

Comparable Company Analysis

These companies are chosen by the analyst and the data are shown by nearest calendar year in descending market capitalization order.
Profitability Analysis
Gross Margin % EBITDA Margin % Operating Margin % Net Margin % Free Cash Flow Margin %
Net Income
Google Inc GOOG USA 18,723 USD 61.1 61.5 61.1 32.5 33.1 33.9 25.0 25.1 25.9 28.4 27.5 27.8 17.3 20.7 22.0
Facebook Inc FB USA 2,955 USD 82.7 83.0 84.0 43.5 48.0 52.0 40.1 32.0 40.0 23.7 32.9 36.9 24.5 32.7 36.4
LinkedIn Corp LNKD USA 254 USD 86.8 87.7 88.2 21.1 26.7 33.2 1.6 5.6 14.7 11.5 13.6 19.7 1.0 13.5 18.8
Average 76.9 77.4 77.8 32.4 35.9 39.7 22.2 20.9 26.9 21.2 24.7 28.1 14.3 22.3 25.7
Twitter Inc TWTR US 101 USD 68.2 70.0 72.0 21.5 23.9 24.6 -38.4 -26.0 3.0 7.2 15.0 17.0 -8.5 12.2 10.0
Leverage Analysis
Debt/Equity % Debt/Total Cap % EBITDA/Interest Exp. Total Debt/EBITDA Assets/Equity
Total Debt
Google Inc GOOG USA 5,237 USD 5.0 4.4 3.8 4.8 4.2 3.6 — — — 0.2 0.2 0.2 1.3 1.2 1.2
Facebook Inc FB USA — USD — — — — — — 64.6 100.8 135.2 — — — 1.1 1.1 1.1
LinkedIn Corp LNKD USA 1,082 USD 32.5 31.8 28.7 24.5 24.1 22.3 — — — 2.3 1.4 0.9 1.6 1.7 1.7
Average 18.8 18.1 16.3 14.7 14.2 13.0 64.6 100.8 135.2 1.3 0.8 0.6 1.3 1.3 1.3
Twitter Inc TWTR US 1,607 USD 44.3 49.9 49.1 30.7 33.3 32.9 7.6 8.9 14.3 5.3 3.0 1.9 1.5 1.7 1.7
Liquidity Analysis
Cash per Share Current Ratio Quick Ratio Cash/Short-Term Debt Payout Ratio %
Market Cap
Google Inc GOOG USA 374,230 USD 95.27 105.91 120.04 4.80 5.32 5.97 4.80 5.32 5.97 32.05 36.35 42.02 — — —
Facebook Inc FB USA 225,965 USD 4.20 4.70 6.29 9.60 8.53 9.73 9.60 8.53 9.73 — — — — — —
LinkedIn Corp LNKD USA 32,174 USD 27.33 26.49 27.47 4.67 3.88 3.55 4.67 3.88 3.55 — — — — — —
Average 42.27 45.70 51.27 6.36 5.91 6.42 6.36 5.91 6.42 32.05 36.35 42.02 — — —
Twitter Inc TWTR US 24,935 USD 2.13 1.57 1.35 10.81 7.69 5.68 10.81 7.69 5.68 13.45 9.91 8.52 — — —
Research Methodology for Valuing Companies

Components of Our The Morningstar Rating for stocks identifies companies trad- of our valuation model. We also quantify the value of each
Methodology
3 Economic Moat™ Rating ing at a discount or premium to our analysts’ assessment of firm’s moat, which represents the difference between a firm’s
3 Moat Trend™ Rating their fair value. A number of components drive this rating: (1) enterprise value and the value of the firm if no future net in-
3 Moat Valuation
3 Three-Stage Discounted
our assessment of the firm’s economic moat, (2) our estimate vestment were to occur. Said differently, moat value identi-
Cash Flow of the stock’s intrinsic value based on a discounted cash-flow fies the value generated by the firm as a result of any future
3 Weighted Average Cost
model, (3) the margin of safety bands we apply to our Fair net new investment. Our Moat Trend Rating reflects our as-
of Capital
3 Fair Value Estimate Value Estimate, and (4) the current stock price relative to our sessment of whether each firm’s competitive advantage is
3 Scenario Analysis fair value estimate. either getting stronger or weaker, since we think of moats as
3 Uncertainty Ratings
3 Margin of Safety
dynamic, rather than static.
3 Consider Buying/Selling The concept of the Morningstar Economic Moat™ Rating
3 Stewardship Rating
plays a vital role not only in our qualitative assessment of a At the heart of our valuation system is a detailed projection
firm’s investment potential, but also in our valuation process. of a company’s future cash flows. The first stage of our three-
We assign three moat ratings—none, narrow, or wide—as stage discounted cash flow model can last from 5 to 10 years
well as the Morningstar Moat Trend™ Rating—positive, and contains numerous detailed assumptions about various
stable, or negative—to each company we cover. There are financial and operating items. The second stage of our mod-
two major requirements for firms to earn either a narrow or el—where a firm’s return on new invested capital (RONIC)
wide moat rating: (1) the prospect of earning above-average and earnings growth rate implicitly fade until the perpetuity
returns on capital; and (2) some competitive edge that pre- year—can last anywhere from 0 years (for no-moat firms) to
vents these returns from quickly eroding. The assumptions 20 years (for wide-moat companies). In our third stage, we
we make about a firm’s moat determine the length of “eco- assume the firm’s RONIC equals its weighted average cost of
nomic outperformance” that we assume in the latter stages capital, and we calculate a continuing value using a standard
Morningstar Research Methodology for Valuing Companies
QQQQQ
QQQQ
Fundamental Economic Company Fair Value Uncertainty
Analysis Moat RatingTM
Valuation Estimate Assessment QQQ
QQ
Q
Analyst conducts Strength of competitive Analyst considers Analyst uses a The analyst then eval- The current stock price
company and advantage is rated: past financial results discounted cash-flow uates the range of relative to Morningstar’s
industry research: None, Narrow, or Wide and focuses on model to develop potential intrinsic Fair Value Estimate,
competitive position a Fair Value Estimate, values for the company adjusted for uncertainty,
3 Financial statement Advantages that confer
and future prospects which serves as the and assigns an determines the
analysis an economic moat:
to forecast future foundation for Uncertainty Rating: Low, Morningstar Rating
3 Channel checks High Switching Costs cash flows. the Morningstar Medium, High, for stocks.
(Microsoft) Rating for stocks. Very High, or Extreme.
3 Trade-show visits
Assumptions are The Morningstar Rating
Cost advantage
3 Industry and company entered into The Uncertainty Rating for stocks is updated
(Wal-Mart)
reports and journals Morningstar’s determines the margin each evening after the
Intangible assets proprietary discounted of safety required market closes.
3 Conference calls
(Johnson & Johnson) cash-flow model. before we would rec-
3 Management and ommend the stock.
Network Effect
site visits The higher the uncer-
(Mastercard)
tainty, the wider
Efficient Scale the margin of safety.
(Lockheed Martin)
@Morningstar 2015. All Rights Reserved. Unless otherwise provided in a separate agreement, you may use this report only in the country in which its original distributor is based. The information, data, analyses and opinions presented herein do not constitute Page 16 of 19
Research Methodology for Valuing Companies

Detailed Methodology perpetuity formula. In deciding on the rate at which to dis- to a fair value we apply in setting our consider buying/con-
Documents and Materials*
3 Comprehensive count future cash flows, we ignore stock-price volatility. sider selling prices. Firms trading below our consider-buying
Equity Research Methodology Instead, we rely on a system that measures the estimated prices receive our highest rating of five stars, whereas firms
3 Uncertainty Methodology
3 Cost of Equity Methodology
volatility of a firm’s underlying future free cash flows, tak- trading above our consider-selling prices receive our lowest
3 Morningstar DCF ing into account fundamental factors such as the diversity of rating of one star.
Valuation Model
revenue sources and the firm’s fixed cost structure.
3 Stewardship Rating
Methodology Our corporate Stewardship Rating represents our assess-
We also employ a number of other tools to augment our valu- ment of management's stewardship of shareholder capital,
* Please contact a sales ation process, including scenario analysis, where we assess with particular emphasis on capital allocation decisions.
representative for more
information.
the likelihood and performance of a business under different Analysts consider companies' investment strategy and
economic and firm-specific conditions. Our analysts typically valuation, financial leverage, dividend and share buyback
model three to five scenarios for each company we cover, policies, execution, compensation, related party transac-
stress-testing the model and examining the distribution of tions, and accounting practices. Corporate governance
resulting fair values. practices are only considered if they've had a demonstrated
impact on shareholder value. Analysts assign one of three
The Morningstar Uncertainty Rating captures the range of ratings: "Exemplary," "Standard," and "Poor." Analysts judge
these potential fair values, based on an assessment of a stewardship from an equity holder's perspective. Ratings
company’s future sales range, the firm’s operating and fi- are determined on an absolute basis. Most companies will
nancial leverage, and any other contingent events that may receive a Standard rating, and this is the default rating in
impact the business. Our analysts use this range to assign the absence of evidence that managers have made
an appropriate margin of safety—or the discount/premium exceptionally strong or poor capital allocation decisions.
New Morningstar Margin of Safety and Star Rating Bands as of August 18th, 2011
Morningstar Margin of Safety and Star Rating Bands
Price/Fair Value
2.75
2.50
2.25 U 1 Star
2.00
1.75 — 175%
— 155%
1.50 U 2 Star
— 135%
1.25 — 125% 115% —
125% —
105% — 110% —
U 3 Star
1.00 — 95% — 90%
80% — — 85% — 80%
0.75 70% —
60% — U 4 Star
0.50 50% —
0.25 U 5 Star
Low Medium High Very High*

Uncertainty Rating
* Occasionally a stock’s uncertainty will be too high for us to estimate, in which case we label it Extreme.
@Morningstar 2015. All Rights Reserved. Unless otherwise provided in a separate agreement, you may use this report only in the country in which its original distributor is based. The information, data, analyses and opinions presented herein do not constitute Page 17 of 19

© 2015 Morningstar. All Rights Reserved. Unless stated

otherwise, this report was prepared by the person(s) noted Conflicts of Interest:
in their capacity as Equity Analysts employed by
Morningstar, Inc., or one of its affiliates. It has not been -No material interests are held by Morningstar or the Equity
made available to the issuer prior to publication. Analyst in the financial products that are the subject of the
research reports or the product.
The Morningstar Rating for stocks identifies stocks trading
at a discount or premium to their intrinsic value. -Equity Analysts are required to comply with the CFA
Institute's Code of Ethics and Standards of Professional
Five-star stocks sell for the biggest risk-adjusted discount Conduct.
whereas one-star stocks trade at premiums to their intrinsic
value. Based on a fundamentally focused methodology and -Equity Analysts' compensation is derived from
a robust, standardized set of procedures and core valuation Morningstar's overall earning and consists of salary, bonus
tools used by Morningstar's Equity Analysts, four key and in some cases restricted stock.
components drive the Morningstar Rating: 1. Assessment
of the firm's economic moat, 2. Estimate of the stock's fair -Equity Analysts do not influence Morningstar's investment
value, 3. Uncertainty around that fair value estimate and 4. management group's business arrangements nor allow
Current market price. Further information on Morningstar's employees from the investment management group to
methodology is available from http://global.morningstar. participate or influence the analysis or opinion prepared by
com/equitydisclosures. them. Morningstar will not receive any direct benefit from
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Morningstar Equity Research

Twitter Inc TWTR (NYSE) | QQQ

Bulls Say/Bears Say 5

Twitter Inc TWTR (NYSE) | QQQ

Twitter Inc TWTR (NYSE) | QQQ

differentiated "one to one," "many to one," and "one to

Scenario Analysis Twitter's narrow economic moat is built on several

Twitter Inc TWTR (NYSE) | QQQ

importance of the media distribution platform and its

Twitter Inc TWTR (NYSE) | QQQ

Bulls Say/Bears Say

Bulls Say Bears Say

Twitter Inc TWTR (NYSE) | QQQ

Cumulative Annual Cash Flow Cushion

Twitter Inc TWTR (NYSE) | QQQ

Management & Ownership

Renaissance IPO ETF 0.01 8.49 — 28 Apr 2015

Spark Management Partners II, LLC 0.01 — -32,364 31 Dec 2014

Twitter Inc TWTR (NYSE) | QQQ

Twitter Inc TWTR (NYSE) | QQQ

MAUs reached 288 million, growing approximately 20%

The company also struck advertising and content

Revenue grew 97% versus 2013, ahead of our expectations,

Twitter Inc TWTR (NYSE) | QQQ

Morningstar Analyst Forecasts

Financial Summary and Forecasts

Operating Margin % -52.8 -24.3 -95.6 -38.4 -26.0 3.0 6.8

Debt/Capital 0.18 0.16 0.06 0.31 0.33 0.33 0.29

Valuation Summary and Forecasts Discounted Cash Flow Valuation

Twitter Inc TWTR (NYSE) | QQQ

Morningstar Analyst Forecasts

Income Statement (USD Mil)

Cost of Goods Sold 129 267 446 666 975

Restructuring & Other Cash Charges — — — — —

Income Tax Expense 0 -2 -1 -217 26

Other After-Tax Cash Gains (Losses) — — — — —

Adjusted Net Income -79 -45 101 334 592

Dividends Per Common Share — — — — —

EBITDA -5 -525 -331 -161 313

Twitter Inc TWTR (NYSE) | QQQ

Morningstar Analyst Forecasts

Balance Sheet (USD Mil)

Cash and Equivalents 203 841 1,511 1,113 957

Accounts Payable 8 28 53 73 107

Long-Term Debt 66 111 1,495 1,495 1,495

Twitter Inc TWTR (NYSE) | QQQ

Morningstar Analyst Forecasts

Cash Flow (USD Mil)

Net Income -79 -645 -578 -404 49

Depreciation 73 111 208 416 209

(Increase) Decrease in Accounts Receivable -74 -112 -178 -221 -220

(Capital Expenditures) -51 -76 -202 -242 -278

Common Stock Issuance (or Repurchase) 2 2,013 54 — —

Exchange Rates, Discontinued Ops, etc. (net) 0 0 -7 — —

Twitter Inc TWTR (NYSE) | QQQ

Comparable Company Analysis

Twitter Inc TWTR (NYSE) | QQQ

Comparable Company Analysis

Research Methodology for Valuing Companies

Morningstar Research Methodology for Valuing Companies

Research Methodology for Valuing Companies

Low Medium High Very High*

Twitter Inc TWTR (NYSE) | QQQ