Is Twitter worth US$ 1 billion? Check out China's proven business model.

Wall Street is abuzz over the US$100mn funding plan for a stake in the fast growth San Fransico based internet messaging company of 60 employees. This values it at US$1 bn. It is expected to have 25 mn users by the end of the year. However, it has peanuts in revenue and the co-founder Biz Stone has gone on record as saying they are still open to exploring advertising. Recently, Facebook valued at US$15 bn with 300 mn users has also been rolling out features similar to Twitter to enable users to share more of their content publicly, as it tries to manoeuvre into this space.

Is this is a sign of a market top? Money is being poured into an unproven business model because it cannot sit on the investment sidelines or be put to work on better opportunities elsewhere. Maybe it will pique the interest of Google and Yahoo. This has echoes of 1999. Remember Pets.com? Formed in 1998, Amazon.com backed them in a US$82mn IPO in February 2000. It had just spent US$2.6mn in a 30 second ad slot for the recent 39th SuperBowl final. Neither external advertising nor online advertising could sustain it. It went bust nine months later and signalled the beginning of the dot.com collapse.

Tencent Holdings in China is a better business model. Started in 1998, its "QQ" instant messaging system proved an immediate hit enabling it to rapidly forge a secure link amongst migrant families and friends between the countryside and the cities. This helped Tencent to eventually broaden out, innovate and add value to mobile users with QQ Games, QQ Music/Radio/Live and Paipai online shopping. Today it is China's leading internet portal with 990m registered users and is publicly listed in Hong Kong (HK# 0700) with a marketcap of US$29 bn , commanding a historic PE ratio of 72! 2009 first half revenues climbed 77% compared to 2008 first half.

So back to Twitter's valuation. One way to look at it is assess what the userfile is worth ie market value per user. Tencent is valued at US$29 (US$29bn / 990mn) given its solid market leadership position (if you believe Tencent's 72 PE ratio is grossly overvalued at today's stock price, it can still fall by 50% and the valuation pared down to around US$14-5). Similarly, Facebook is at US$50 while Twitter is at US$40 today based on 25 mn users. If it achieves 100mn users, the valuation improves to US$10.

Putting aside social democracy, the fast pace of technological innovation and focussing on just the numbers, Tencent has the edge here. It's still handsomely growing that top revenue line despite the economic downturn. Twitter looks a risky bet based on just the projected number of users.