With Twitter issuing shares on the New York Stock Exchange (NYSE) this week, a popular question at the moment is “should I buy Twitter shares” and “how do I buy Twitter shares as a UK investor?”

Let’s start with the answer to the first question, which of course, is that it all depends on the valuation of the business at the time of Twitter’s Initial Public Offering (IPO).

If you think the business is worth more than this valuation, then buy the shares.

If you think the business is not worth that much money, then avoid the shares and wait for them to fall in price before buying, which was the best strategy for the overvalued and overpriced Facebook IPO.

But how will you know whether the Twitter valuation is too high like Facebook; a bargain like Royal Mail or about right?

What Is Fair Value For Twitter?

Valuing a company is not quite as straight-forward as you might think.

As I explained in my article on Valuation Methods, there are 3 main ways of valuing a company.

The data we will use is taken from the Twitter Inc. Registration Document recently published with the Securities Exchange Commission (SEC).

Net Asset Valuation Method

At the end of September 2013, Twitter’s Net Assets were valued at -$179.7 million, which is not good!

This should be a positive figure and a negative one says that Twitter has been spending money that it doesn’t have.

At flotation, new cash will come into Twitter’s business resulting in its Net Asset Value (NAV) increasing to $705 million, so I’m going to use this figure for my valuation.

However, as Twitter is not an asset rich company (it is not like a real estate company, for example), it would be unfair to value Twitter at only 1 times its asset value.

So how many times should we value it at?

As a comparator, Facebook is valued at 7.9 times net assets and Google at 4.8 times.

These ratios are known as Price to Book Value (PBV) ratios.

Applying these ratios to Twitter, yields a valuation of $3.38 billion to $5.57 billion.

Notice that these valuations are well short of the $13.6 billion valuation that would result from an initial share price of $25 as currently expected!

Price To Earnings Comparison Method

Twitter has never made a profit in its history to date and in the first 9 months of this year, has continued this trend with its biggest loss so far of $422.2 million.

This is another red flag and for us to use the PE method, we need these earnings to be positive, which is unfortunately not the case.

I’m therefore going to use a similar method known as the Price To Sales method, which works in exactly the same way as the PE method, except it uses sales instead of earnings.

2012 sales for Twitter was $316.9 million, for Facebook was $5,089 million and for Google was $50,175 million.

Facebook is therefore trading on a multiple of 23.8 times 2012 sales (stupidly high) and Google is trading on a more realistic (but still high) 6.8 times.

Applying these already high multiples to Twitter yields a valuation of $2.15 billion to $7.54 billion.

Notice that these too, fall well short of the $13.6 billion valuations mentioned elsewhere.

Should I Buy Twitter Shares?

Before I started doing my research for this article, Twitter’s shares were supposedly being offered at $17 per share.

At that price, they looked worth a punt, mainly because they are coming to the market at an earlier stage of their growth than Facebook did and because the price felt okay.

However, in the last few days, management have raised the offer price to $25 already and will probably float at a higher price than that when the offer price is finalised tomorrow.

My instinct therefore tells me that Twitter’s shares are being over-hyped and overpriced just like Facebook’s were.

Based on my calculation above, they are 1.8 to 6.3 times that of their closest competitors, who both are several times larger in size than Twitter, are profitable already and have a stronger track record.

And that’s on top of my thinking that Facebook and Google are overpriced too!

My advice is therefore to avoid the IPO and wait for the price to fall before buying.

How Can UK Investors Buy Shares In Twitter?

Luckily, UK investors are unable to buy Twitter shares at the IPO.

So if you want some, you’ll have to buy them in the secondary market (i.e. normal way) via a UK broker that offers dealing in US shares.

I use Halifax Share Dealing for my ISA and Hargreaves Lansdown for my SIPP but there are others you could use e.g. Barclays Stockbrokers.

If you’ve never bought US shares before, you’ll also need to complete a W-8BEN form, which you can obtain from your broker, to avoid the US Inland Revenue Service withholding too much tax on your share dividends.

Personally, I would not get carried away by buying Twitter shares when they first start trading on Thursday afternoon (UK time) this week – I would wait for the share price to fall back (assuming it will of course).

Set yourself a target price at which you are interested in buying and then wait for it to come to you.

If it doesn’t, so what?

There are plenty of other great companies to invest in.

If you want to know how to find great companies then you might want to apply for one of my Stock Market Success Breakthrough Sessions?

We’ll have a chat and work out how you can unlock your hidden investment skills to create the wealth, income and life that you want but is passing you by at the moment while you watch from the sidelines.

Starting to invest in company shares of good, strong businesses is not difficult and won’t take up much of your time if you allow me to show you how.

Alternatively, leave me your comments about this article and the Twitter IPO below or click the share buttons to share this article with your friends.