Twitter (NYSE:TWTR) got whacked another 12% on Monday following more media reports that potential bidders were dropping like flies. The stock is now down an incredible $8 from the high on October 5 as the daily rumors of parties interested in bidding hit a peak.
The problem with most investors is that momentum seems to rule investing decisions with a complete ignorance of the crucial concept that price matters. With the market value back down below $12 billion, the likelihood exists that some bidders return to the fray looking to scoop up the social media firm on the cheap.
All of my warnings in the buyout frenzy was that nobody was talking legitimate prices on the deal. Twitter was rumored to want possibly $30 billion while some signs emerged that the Board of Directors might accept $29.
The details always suggested that most of the potential bidders couldn't afford even paying $29, much less $40. The deflating Salesforce (NYSE:CRM) stock in the process told the story that CEO Marc Benioff wasn't going to be able to pull off a bid acceptable to Twitter. The key though is now Reuters reports that Salesforce is possibly even more interested as the big stock dip could make Twitter more compelled to lower the offer price.
The problem with any bidder hoping to steal the stock below $29 is that the live-streaming numbers and specifically the NFL results after three weeks give the platform a huge catalyst. The amount of people tuning into the game at least for a minimum of three seconds continues to soar.
Source: CNBC video
The only disappointing number for the week 5 game for Thursday Night Football and game 3 for Twitter was a decline in the average audience to only 236,000. This number is more crucial for advertisers, but also likely indicative of the quality of the game involving the 49ers and the Cardinals without the starting QB.
The Texans/Patriots game surged to 327,000 average audience on fewer total viewers. The Broncos/Chargers games on Thursday offers a more compelling matchup with the Super Bowl champs against a competitive and entertaining Chargers team.
The Presidential debate recently saw record debate engagement again suggesting the social media service is in turnaround mode after a lackluster summer. Even more encouraging is that the daily shows from Bloomberg media start on October 11.
These recurring broadcast shows are the keys to an engaged user base. Right now, Twitter has shows like #TheRally from 120 Sports and Periscope now shows the Opening Bell show from Cheddar. This show will eventually stream on Twitter along with an exclusive Closing Bell show.
Both are relatively new media companies without the reach of Bloomberg, but even the Cheddar show reached 40,000 viewers on Monday though the show regularly averages somewhere around 5,000 viewers with the smaller Periscope user base.
The key point being that Twitter finally has the broadcast quality shows to drive user engagement. Investors that dumped the stock for the lack of engagement during the Olympics are now missing that engagement is back up.
As highlighted in the last article, Twitter was already turning cheap on Friday as the stock dipped below $20 based on the multiple obtained by LinkedIn (LNKD) in their buyout. Twitter dropping 12% on Monday only added to the value proposition.
A similar valuation to LinkedIn would price Twitter in the $22 to $23 range. The stock could easily garner a far higher valuation once the higher engagement numbers start filtering into revenues next year. Analysts only forecast 12.4% revenue growth in 2017 to roughly $2.9 billion. Based on the improved engagement, Twitter could easily surprise on the upside and warrant not accepting any deals from the likes of Salesforce that likely tried to get the service on the cheap.
The key investor takeaway is that price matters, especially before the company can show Wall Street the growing engagement numbers. Twitter above $24 was difficult to support with the current results, but the stock below $18 is easy to support with valuation more compelling. Besides, don't be surprised if somebody like Salesforce makes a run at the company if the stock hangs out below $18 for long.
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.
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