Twitter valued at $7billion, but based on what exactly?

Twitter is looking to raise another round of private financing, as reported by the Wall Street Journal, quoting “people familiar with the matter”. This time the value is US$7billion, almost double of what it was valued at the end of 2010.

Clearly there’s still a hunger for tech stocks in the market. We’ve seen this in the spectacular Wall Street debuts — though not in the press — of tech companies like Groupon and Zynga which also filed for their IPOs recently.

It’s well and truly open season in the investment world for tech companies.

After the staggering valuation of US$3.7billion for Twitter in December — which resulted in a cash inflow of US$200million — the micro-blogging service must be looking for a way to finance its buying spree.

Not only did Twitter just acquire popular client TweetDeck for a reported US$40-million, but also recently acquired Backtype which itself raised private financing of US$1.3-million, leading to fair speculation that the financials of the deal, though undisclosed, were not insubstantial.

As the Journal points out, Twitter’s drive to monetise, based primarily on an advertising model, is relatively less developed than the company’s fierce competition in the social media sector. Just take a look at Facebook.

Twitter, which had shied away from “intrusive” advertising has also recently decided to tweak its advertising model. The model based on promoting particular tweets and accounts for a fee has never — till now — been within the stream of a user’s account.

At the time reports on the change were circulating, Sean Garrett, Twitter’s VP of Communications was quoted as saying , “We’ve been talking about Promoted Tweets in the timeline since we launched Promoted Tweets … We have and will continue to take a measured and thoughtful approach to how we may display them.”

Twitter does therefore seem to be taking its main revenue stream (apart from the numerous investment injections) seriously, and is looking to gear up its advertising offering. That said however, do reported advertising sales of up to US$150-million for this year truly hold up to this near-on baffling valuation?

We know the promise of Twitter based on its meteoric rise in user numbers. But are investors being duped by the endless ream of statistics, reporting “stunning growth” of users or tweets per day (and so on) rather than looking at the financial facts?