November 20, 2013

NYSE: TWTR

TWITTER INC

lower tax territory as a tax mitigation strategy. Similar companies are taking advantage of the double Irish arrangement under current transfer pricing rules to reduce their taxes. We project 23% to be a suitable tax rate to take effect by the time estimated net income turns positive by 2017. Our model uses a long-term growth rate of 6% and a long-term discount rate of 11.5%, similar to that of Google, and a short-term discount rate of 7%. Our comparable analysis shows a $20 2014E 4Q valuation using a weighted average of EV/REVENUE multiples based on enterprise value. Negative cash flows and heavy R&D spending make valuation based on comps difficult. We decided not to use the adjusted EBITDA figures because this was also negative leaving EV/Revenue the best viable option. Twitter is currently selling at a 44 EV/Reveue multiple. After making appropriate adjustments to reach enterprise values, we decided weighting the multiples would be the best option to mitigate the influence of the low 1.45x revenue on IAC/InterActiveCorp and high 17x revenue on LinkedIn; both of which are small in comparison to Google and Facebook. For comparison on the upper range of possible outcomes Facebook’s 14.83x revenue equates to $35 Twitter valuation, which we believe is high, yet it would still instigate a sell rating.

Comps Valuation

Recommendation Price 13-Mo Target Price $41.01 (as of 11/20/13) $23.00

Sector: Information Technology | Sub-Industry: Internet Software & Services | Source: S&P Summary Twitter, Inc. is a social networking company that allows people to connect, share, and communicate worldwide on computers and mobile devices.

Twitter’s revenue growth is exceeding the industry average. Though the recent IPO shows it coming out of the starting gates strong, it remains to be seen how quickly the company will turn profitable as it strives for growth. We believe the stock is overvalued and project an end of year 2014 target price of $23. Our 13 month price target is based on an average of a $25 discounted cash flow valuation and a $20 price based on EV/EBITDA multiples. Risks to the model include difficulty becoming profitable due to highly competitive forces by existing rivals like Facebook, and new entrants like Snapchat due to low barriers to entry. Twitter needs to stay innovative viable in the eyes of end-users. Tax loopholes to reduce effective tax rates may disappear due to legislative actions by Congress. There is also potential negative price pressures due to selling when investor lockups expire mid next year. Twitter will likely face increased pricing pressures from customers and may have a potential inability to fully monetize social media. Twitter must successfully demonstrate the value of its service to advertisers and advertising agencies.

Our DCF model estimates a $25 2014 end of year price target. We assume 2013 revenue to grow at 105% by the end of this year and steadily decline to a reasonable information technology industry average of 30% by 2019. Expected cost of revenues are projected to increase to 60% of revenues due to increases in depreciation attributable to capital leases and additional server and networking equipment, employee incentives, and increased headcount, declining to 25% of revenues over the next four years. We expect research to tick up by the end of this year, but return lower levels within the next three years. Given the great opportunity for further market penetration and the recent IPO, sales and marketing will likely rise over last year’s budget by slightly more than double to 35% of revenues in the near-term; slightly above competitors Facebook and Linkedin. General and administrative expenses have seen great reduction in the rate of growth each year. We expect this trend to continue. Though the company is currently structured to put itself in the 35% tax bracket, there is lots of potential to move operations and intellectual property to

Investment Rationale/Risk

DCF Valuation

Price Performance

November 20, 2013

NYSE: TWTR

TWITTER INC

(In Thousands) FB LNKD Z IACI GOOG YHOO AKAM TWTR 2014E

Price 46.43$                216.19$           72.98$           55.67$           1,022.00$          35.62$             45.22$           20.04$                  

Times: shares outstanding  2,450,000          119,400           38,940           83,280           334,090             1,040,000       179,000        544,700                

Equals: equity market cap 113,753,500$   25,813,086$  2,841,841$  4,636,198$  341,439,980$   37,044,800$  8,094,380$  10,915,486.78$  

Plus: debt (most recent quarter) 575,000$           ‐$                 ‐$               580,000$      7,140$                121,170$        ‐$               185,000$              

Plus: preferred stock ‐$                    ‐$                 ‐$               ‐$                    ‐$                 ‐$               ‐$                       

Equals: total invested capital (TIC) 114,328,500$   25,813,086$  2,841,841$  5,216,198$  341,447,120$   37,165,970$  8,094,380$  11,100,486.78$  

Less: cash 12,428,000$     2,270,000$     365,000$      767,990$      54,740$             1,830,000$     566,000$      321,000$              

Equals: enterprise value (EV) 101,900,500$   23,543,086$  2,476,841$  4,448,208$  341,392,380$   35,335,970$  7,528,380$  10,779,486.78    

Sales 6,871,000$       1,384,944$     173,534$      3,063,783$  57,386,000$     4,760,392$     1,519,814$  1,300,000$          

EV/Sales 14.83                  17.00               14.27             1.45               5.95                    7.42                  4.95              

Weight 20% 5% 0% 1% 66% 7% 1%

Weighted EV/Sales 2.93                    0.77                  0.07               0.01               3.93                    0.51                  0.07               8.29                       

CORPORATE OVERERVIEW While twitter is both unique and has a large user base of 230 million monthly active users, growing at a staggering pace, revenues and importance in the industry are still quite undefined. Twitter is not impervious to competition. It is extremely small in comparison to Google, Yahoo, and Facebook, and is yet to truly monetize this growing network into profit. The majority of end-users are on smartphones. Currently 70% of Twitter’s revenues come from mobile devices. Unlike a Facebook where users have high loyalty, or a large search engine where advertisements are inescapable, Twitter has limited options to raise revenue without turning off their end-user base on these smaller mobile devices. Popularity, usefulness, and ease of use are critical to performance versus competitors. While many look to the number of active users as the benchmark for valuation, we feel this is misguided as businesses have limited marketing dollars to spend. Businesses can become a customer and pay by the number of tweets or with a higher set fee by the package and level of service. Rivalry amongst existing competitors is high. There are numerous opponents like Google, Tumblr, Friendfeed, Snapchat, Instagram, Vine, and Pinterest striving for the same ad dollars. Despite first-mover advantage, competitors provide quite similar yet uniquely different substitute products. Despite the fact that 77% of Fortune 500 companies currently have active twitter accounts,

according to a University of Massachusetts Dartmouth study by Barnes, Lescault, and Wright, bargaining power of buyers is high and pricing power for Twitter is weak. As the barriers to entry are quite low, it will be quite difficult for this rising star to stay on-course without lots of tactical maneuvering.

As the second largest social network, one of the most important assets Twitter possesses is the massive amounts of data collected on users. To get access to the data, companies have to pay Twitter to get an opportunity to analyze all the data. It also has a good search capability that will steal market share from large search engines.

Business Summary

Corporate Headquarters: 1355 Market Street Suite 900 San Francisco, CA 94103 United States Phone: 415-222-9670 Website: http://www.twitter.com Full Time Employees: 2,300 Key Officers: Mr. Jack Dorsey , 36 Co-Founder and Chairman Pay: N/A Mr. Richard Costolo , 49 Chief Exec. Officer and Director Pay:$ 200,000 Mr. Christopher Fry , 43 Sr. VP of Engineering Pay: $245,000 Mr. Adam Bain , 39 Pres of Global Revenue Pay: $400,000 Mr. Mike Gupta , 42 Chief Financial Officer Pay: N/A

Corporate Information

November 20, 2013

NYSE: TWTR

TWITTER INC

(Millions)

FY10A FY11A FY12A FY13E FY14E FY15E FY16E FY17E FY18E FY19E FY20E

Total Revenue $28 $106 $317 $650 $1,300 $2,340 $3,744 $5,242 $7,076 $9,199 $11,959

Growth 276% 198% 105% 100% 80% 60% 40% 35% 30% 30%

Cost of Revenue $43 $63 $129 $390 $520 $819 $1,123 $1,310 $1,769 $2,300 $2,990

% of Revenue 153% 59% 41% 60% 40% 35% 30% 25% 25% 25% 25%

R&D $29 $80 $119 $325 $520 $819 $1,123 $1,310 $1,415 $1,840 $2,392

% of Revenue 104% 75% 38% 50% 40% 35% 30% 25% 20% 20% 20%

Sales & Marketing $6 $26 $87 $228 $442 $749 $1,123 $1,468 $1,911 $2,392 $2,990

% of Revenue 22% 24% 27% 35% 34% 32% 30% 28% 27% 26% 25%

General & Administrative $17 $66 $60 $104 $195 $351 $562 $786 $1,061 $1,380 $1,794

% of Revenue 60% 62% 19% 16% 15% 15% 15% 15% 15% 15% 15%

EBIT ‐$67 ‐$128 ‐$77 ‐$397 ‐$377 ‐$398 ‐$187 $367 $920 $1,288 $1,794

Interest Income (expense) $0 ‐$1 ‐$2 ‐$6 ‐$6 ‐$7 ‐$7 ‐$8 ‐$8 ‐$9 ‐$9

Other Income (expense) $0 ‐$2 $0 $0 $0 $0 $0 $0 $0 $0 $0

Taxes $0 ‐$1 $0 ‐$93 ‐$88 ‐$93 ‐$45 $83 $210 $294 $411

% Effective Tax Rate 0% 1% 0% 23% 23% 23% 23% 23% 23% 23% 23%

NI ‐$67 ‐$127 ‐$77 ‐$304 ‐$289 ‐$305 ‐$143 $284 $710 $994 $1,383

D&A $10 $24 $73 $150 $157 $165 $173 $182 $191 $200 $210

Stock‐Based Compensation $6 $60 $26 $185 $320 $232 $173 $66 $0 $0 $0

WCInv $0 $0 $0 $0 $0 $0 $0 $0

Capex ‐$230 ‐$242 ‐$254 ‐$266 ‐$280 ‐$294 ‐$308 ‐$324

Acquisitions ‐$100 ‐$100 ‐$100 ‐$100 ‐$100 ‐$100 ‐$100 ‐$100$0 $1 $2 $3 $4 $5 $6 $7

FCFE ‐$299 ‐$153 ‐$261 ‐$162 $153 $507 $786 $1,170

Terminal $22,550

PV ‐$143 ‐$228 ‐$133 $117 $362 $524 $14,771

NPV $15,269

Shares Outstanding $668

Current Fair Value per Share $23

Terminal $22,550

PV ‐$244 ‐$142 $125 $387 $560 $15,805

NPV $16,492

Shares Outstanding $668

2014 Fair Value per Share $25

(IN THOUSANDS)

FB 2010 2011 2012

Total Revenue $1,974 $3,711 $5,089

Growth 88% 37%

Cost of Revenue $493 $860 $1,364

% of Revenue 25% 23% 27%

R&D $144 $388 $1,399

% of Revenue 7% 10% 27%

Sales & Marketing $167 $393 $896

% of Revenue 8% 11% 18%

General & Administrative $138 $314 $892

% of Revenue 7% 8% 18%

EBIT $1,008 $1,695 $494

Taxes $402 $695 $441

% Effective Tax Rate 40% 41% 89%

NI $606 $1,000 $53

(IN MILLIONS)

LNKD 2008 2009 2010 2011 2012

Total Revenue $78 $120 $243 $522 $972

Growth 54% 103% 115% 86%

Cost of Revenue $19 $26 $45 $81 $126

% of Revenue 24% 22% 18% 16% 13%

R&D $29 $39 $65 $132 $257

% of Revenue 38% 33% 27% 25% 26%

Sales & Marketing $17 $27 $59 $165 $325

% of Revenue 22% 22% 24% 32% 33%

General & Administrative $13 $19 $35 $75 $128

% of Revenue 17% 16% 14% 14% 13%

EBIT ‐$4 ‐$3 $19 $23 $57

Taxes $0 $1 $4 $11 $36

% Effective Tax Rate ‐7% ‐27% 19% 48% 62%

NI ‐$5 ‐$4 $15 $12 $22