By Scott Tzu
Twitter (NYSE:TWTR) is going to be acquired.
If it does not get acquired, we expect it will appreciate in value as the company begins to execute again or as the market begins to understand the platform's potential and how undervalued it is now. The marker got a taste when the LinkedIn (NYSE:LNKD) buyout was announced. We think Twitter is now in play as a result of it. Today, we are going to make the very common sense argument as to why we would look to potentially add to Twitter shares if shares move lower as part of a broader market pullback.
The inability to create shareholder value at Twitter is really quite baffling. The company owns a medium that most financial professionals are plugged into for real-time stock news and alerts, as well as business news and current events. For all intents and purposes, Twitter is the best medium to watch live news as it is unfolding anywhere in the world.
It's for these reasons that we think Twitter will eventually find a buyer. We think anything under $15 for Twitter is cheap enough to leg into, so we're going to be watching TWTR closely if the markets continue to sell off into the new week.
We think the market is aware of this, as well, which is why TWTR didn't sell off too much on Friday.
With the addition of Periscope, Twitter can be an extremely valuable commodity. When Periscope is compared to other streaming video methods, it is clearly the dominant choice right now. Porting this technology from the Periscope app over to desktops in a timely fashion would make Twitter arguably the leader in live streaming Internet video and put it ahead of services like Blab and YouTube Live.
When a company has commodities like these, especially in the digital age, it becomes difficult to understand how they're having trouble monetizing. While growth rates are down and monthly active user numbers have not been impressive, Twitter has an installed user base in the hundreds of millions that, if it was operating efficiently, it should be able to monetize regardless.
We were critical of the company's change in management when Dick Costolo stepped down from the CEO position. Bringing Jack Dorsey in has just extended the apparent apathy toward creating shareholder value that the last regime had.
Instead, those long Twitter over the last year or two since the company's IPO have seen nothing but pain. That pain reached a fever pitch after the company's last earnings report where TWTR traded as low as $12 per share, an area that we definitely think it is worth buying it should get there again.
Twitter is Far More Appealing than LinkedIn
From an innovation standpoint, we simply don't think that LinkedIn was a great company. It is essentially trying to turn itself into a social network now similar to Facebook and its claim to fame is that it is mostly a tool for business people to put their resumes online.
Facebook (NASDAQ:FB) offers similar options in the way that it allows you to add your work history, but LinkedIn has been accepted as the polished industry standard for online personal promotion and as a job hunting tool.
From an innovation standpoint, we don't really think that LinkedIn has done anything worthy of the buyout that they received. Microsoft (NASDAQ:MSFT) bought the company probably just for its data. While they will probably try to develop LinkedIn further, the key component of the buyout was getting access to the company's data, which it has compiled on hundreds of millions of users since it has been in existence.
We think that Twitter has LinkedIn beat for several reasons.
First, Twitter also has a ridiculous amount of data on its members. One look at the analytics page of your own Twitter account will show you that Twitter can be an enormously powerful tool from an analytical standpoint. Promoted tweets on Twitter are a fantastic way of advertising and we simply don't understand why Twitter can't keep up with Facebook in terms of bang for its advertising buck.
Second, Twitter has actual innovation. The fact that tweets need to be 140 characters or less, while it seems counterintuitive, is actually a brilliant idea. It forces people to keep things short and sweet and is a great way to get headlines across quickly. Keeping the 140 character limit is essential to upholding the benefits of Twitter.
Third, Twitter also gets an enormous amount of free press. People's Tweets and people's Twitter handles are posted on cable television all day every day and Twitter easily gets the most free press out of any of the social networking sites.
Finally, the addition of Periscope to any number of companies can be an absolute game changer. What started as a couple hundred million dollar investment for the company may turn out to be the saving grace for Twitter. Live broadcast video will be the logical next step for social media going forward. As long as Twitter can continue to develop and innovate through Periscope in a timely fashion, this asset as part of the bigger package of Twitter would definitely be worth an acquisition.
Again, we think it just makes sense for TWTR to be acquired,
- From a valuation standpoint, one has to look at the company as a potential acquirer would. The company's enterprise value to sales of 3.9X makes it extremely attractive to another company in the same field that would be able to unlock synergies going forward.
- Twitter currently has almost $4 billion in the bank and just $1.6 billion in total debt. Its enterprise value of $9.47 billion means that it could likely be acquired for the neighborhood of $15 billion, which is a sum that many large companies have laying around.
- It would be very easy for in an acquirer to come in and make an all-cash bid for the company here and immediately start to recognize the benefits of owning the company's data, owning Periscope, and having synergies with research and development to help monetize Twitter more on an earnings basis going forward.
- Other media companies could unlock substantial value in the platform as a news aggregator, instead of just a social media platform
All in all, we think Twitter is a fantastic acquisition opportunity. If we were a company like Yahoo (NASDAQ:YHOO) or Google (NASDAQ:GOOG) (NASDAQ:GOOGL), it would be on the top of our list in terms of deals that need to get done. We think the valuation here at $16 is probably just about right for assessing the risk versus reward. We added to our Twitter position when the stock was at around the $13 level and if the stock continues to move lower from here in the event of a market pullback, we would look to add to our Twitter position further
Disclosure: I am/we are long TWTR.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.