Why Twitter Inc (TWTR) Will Finally Get Bought Out

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Twitter stock - Why Twitter Inc (TWTR) Will Finally Get Bought Out

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To hear the words “buyout” and Twitter Inc (NYSE:TWTR) mentioned in the same sentence isn’t exactly ground-breaking. The micro-blogging platform has been (legitimately) suggested as an acquisition target several times going as far back as 2009, when Facebook Inc (NASDAQ:FB) and Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL) were both rumored to be on the verge.

Why Twitter Inc (TWTR) Will Finally Get Bought Out

It didn’t happen then, of course. Nor has it happened any of the several times the idea has surface in the meantime … as owners of Twitter stock know all too well.

TWTR shares are down more than 70% from their late-2013 peak, as the cracks in the company’s business model began to show. Talk about a coulda-shoulda-woulda regret, not entertaining possible offers and instead opting to forge ahead on its own.

Well, for better or worse, the notion of an acquisition need not be completely off the radar anymore. Twitter stock is dirt-cheap and the company still operates a viable business — one of the details often obscured by alarmingly slow user growth rates.

A Twitter buyout is back in the realm of possibility.

3.6 Billion Reasons to Acquire Twitter

Calling a spade a spade, few have denied that Twitter has some sort of business. There’s a reason 313 million users come back to the site on a fairly regular basis. And there’s a reason it has been able to drive $2.48 billion worth of revenue over the course of the past 12 months, inching closer and closer to profitability.

What Twitter has not been able to do, though, is convince anyone it has a compelling growth plan. Perhaps that’s because TWTR has been unable to fully explain what the website is supposed to be. We know what it does. But nobody really knows what it’s supposed to be.

That’s not to say in others’ hands Twitter wouldn’t become something with a crystal clear revenue-bearing purpose, though. It can have an increasing amount of value. It’s just a question of unlocking it. CEO Jack Dorsey has yet to turn the key. Maybe he can’t. Someone else can, though.

That’s when it become a matter of price.

When Is Twitter Stock Priced to Buy?

With Twitter stock trading below $19 per share, the company’s market cap is a mere $13 billion — chump change for some of the world’s bigger companies. It’s not even that much, though, when factoring in how much cash and how little debt Twitter is sitting on. TWTR has $3.6 billion in cash ready to tap, and only $1.5 billion worth of debt. Subtracting that cash and adding its debt back on, the effective market cap for a would-be suitor is only $10.9 billion.

As a reminder, Twitter drove $2.5 billion in sales over the course of the past 12 months, which was nearly 40% better than the comparable 12 months before that.

In other words, revenue growth isn’t a problem. This year’s projected top line of $2.56 billion isn’t unreasonable.

Even if Twitter didn’t grow revenue one iota, though, the trailing price/sales ratio based on the adjusted market cap of $10.9 billion is a palatable 4.36. The aforementioned Alphabet trades at 6.7 times its sales, while Facebook is valued at 16.1 times its trailing top line.

Granted, Facebook and Alphabet are both profitable on an operating basis, whereas Twitter isn’t. That’s the crux of any Twitter-buyout argument, though: What would it take to make Twitter profitable in the foreseeable future?

No one really knows.

The Real Value of Twitter

But maybe most observers are looking at the matter in the wrong way.

While the Twitter business model may never be viable, those 313 million users do have value. And they might have more value when monetized in a different way. See, if nothing else, a suitor has access to those users’ e-mail addresses, and more or less has a demographic profile on each one of them.

For perspective, the average Facebook user generated $3.73 worth of revenue for the social networking site in the first quarter of the year. Annualizing that translates into $14.92 worth of revenue per user. Twitter is only doing about a third as well.

That’s not to say Facebook could simply buy Twitter, garner its users and instantly add a profitable $4.7 billion to its yearly top line. It is to say, however, that a list of active social media users like the one TWTR has could be even more fruitful under a different umbrella.

Between that and the company’s cash balance, Twitter wouldn’t be a bad pickup. At least not for a buyer with a clever idea of how to get more out of the Twitter platform.

Bottom Line for Twitter Stock

Don’t misunderstand. This isn’t a clarion call to buy Twitter stock on the grounds of in inevitable buyout. It is to say, however, the potential value is there. If Jack Dorsey doesn’t start unlocking that value soon, the board of directors could change their tune about holding out for a turnaround.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities.

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Article printed from InvestorPlace Media, https://investorplace.com/2016/08/twitter-stock-twtr-will-finally-be-bought/.

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