This article was written by my industry friend Pace Lattin and taken directly from his site, IndustryPace.com.

According to TechCrunch, Twitter has at least $1B valuation, despite it not having made a single dollar in revenue yet. Some other articles claim that twitter is worth at least $1.7 Billion, and others have claimed even higher numbers. However, I am a firm believer that twitter is virtually worthless and its valuation is completely based on a faulty system where investment companies overvalue users.

First in doing an analysis of twitter, we need a good look at the actual users. According to Compete.com in December of 2010, 26M people used/visited twitter. Compared to Facebook’s 142M, it’s a small number but really nothing to sneeze at. This number is however important, because using this we can get an approximate value of each user. If we were to believe the evaluaton of $1B, each user would be worth approximately $38 to the company in its evaluation.

While this number seems pretty high, I’d like to look at the user habits using Alexa, and see what they are doing. According to Alexa, the Daily Page views per user are currently less than 4 page views per users, up from 10 at the start of 2009. That means on a daily basis each of the 26M users only view 4 page views, and are not really “interacting with the site.” This number is extremely important in comparison to Facebook which had an average of around 12 page views per visitor per day.

If we were going to translate this into advertising impressions (instead of clicks) which is the currency of the display economy, there are some very, very interesting numbers. If the value of those page impressions with advertising is an average of a very liberal estimate of %.50 cpm we come up with a very disturbing number of $52,000 in revenue per day. On a yearly basis, that is only $18M a year in revenue. If we are going to say they are making $1CPM in advertising that is still only $36 M a year in revenue. At $2CPM, which is being extremely, extremely nice to twitter, that is $72M a year in advertising revenue.

What’s even more problematic about twitter is the lack of growth the company has had in the last year. Remember while facebook has grown almost 10% in the last year, the twitter growth rate has been close to Zero. At the same time as mentioned above, with no growth, the page views per user has decreased substantially, meaning that those users are not as engaged as they were when they first signed up. Obviously there is some churn rate, some people leaving and some people being added, but these numbers should raise some questions.

These numbers are disturbing, but they interest me even more combined with a very disturbing number. According to most reports, the average churn rate of twitter users who come to twitter, and then fail to return is in the 60% range. That means 6 out of 10 users never use twitter again, according to all reports for the last two years.

This stat is extremely important because it addresses an acquisition cost that needs to be addressed, especially those who are familiar with performance based acquisition marketing. If the average twitter user is worth $38, but the churn rate is 60%, then what exactly is the cost of acquiring new sign ups? I actually don’t know how to calculate this, but I do know that for less than $1, I can acquire new users for almost any product using a variety of techniques. I don’t know how many of those people will stay with the company, but I’m sure that it’s much higher than 1 out of 38, which is the acquisition rate at $38 per user. Assuming that even 25% of users continue to use my “new product” the acquisition rate is only $4.00 per user. That means that I would only need $104M to get enough users to be a $1B valuation company, based on the twitter values and a 25% retention rate.

The other problems involved with twitter are that 12% of its traffic comes directly from Facebook on a daily basis. I’m not sure if those are actually users who are registered with twitter, or just people who click on a tweet posted on Facebook – I’m sure it’s a mix. If any of the consistency of twitter visitors is from that, then there is another issue with twitter that I think everyone else knows: it’s highly dependent on Facebook, and if Facebook develops a competitor and bans twitter, what then? Add that almost 10% of the traffic also comes from Google, then we have some serious questions about a company that 22% of its daily traffic comes from two main sources.

The twitter evaluation of $1B or even more is plain ridiculous. While there is value as a tech product that could be sold to Google or Facebook, the actually value of those users is pretty thin. There is no product there except the tweets which themselves are rendered useless in any world that Facebook takes over that function – and most likely will. Twitter doesn’t really have a product except as a simple message transport system, and anyone can copy that. My crystal ball says that either Twitter gets sold, or if it doesn’t, it will disappear within the next 12 months. Remember, even Myspace is still twice as large as twitter and it was only bought for $580M.