To say Twitter Inc (NYSE:TWTR) did well on Friday would be an understatement. Twitter stock jumped a hefty 21% last Friday following semi-credible rumors that an acquisition was imminent. Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL) and Salesforce.com, Inc. (NYSE:CRM) were named as the two most likely suitors, though Walt Disney Co (NYSE:DIS) has also been named as a possible buyer.
It’s not the first time the idea of a buyout has been floated for Twitter … or even the second or third time.
And yet, much like each of the previous times the chatter of an acquisition has surfaced, this one has already begun to flame out once the dust has begun to settle. As it turns out, Twitter may not be as “for sale” as so many traders were hoping it would be on Friday.
What’s Twitter Stock Actually Worth?
Oppenheimer Holdings analyst Jason Helfstein arguably threw the most cold water on the idea of a Twitter buyout propping the stock’s price up. He downgraded Twitter stock to “Underperform” Monday morning, and lowered the firm’s price target on TWTR to $17 after it closed at $22.62 on Friday.
Helfstein explained:
“We believe that Twitter is overvalued compared to its peers, and is already discounting a take-out premium. Moreover, any acquirer would have to cash out employee options and make large capital investments to improve the user experience and advertising technology.”
Helfstein wasn’t alone in his thinking that a Twitter buyout seemed unlikely at the current value of TWTR stock, let alone a higher price. Citigroup analyst Mark May commented:
“As a result of Friday’s move, we now believe that the risk-reward skews to the downside for TWTR. While we see some strategic rationale for certain companies to acquire Twitter, the company’s struggles and steep valuation make a deal at a meaningful premium — especially from here — less likely in our view. At the current price of ~$22.50, a potential $26 bid (source: CNBC, unsubstantiated) would represent ~15% upside, but should a bid not materialize we think the stock could retest the lows of late May (~40% downside) given the company’s stagnant user growth, deteriorating financials, and the likelihood of even further downside to consensus forecasts.”
Axiom’s Victor Anthony reiterated May’s assessment that a take-out price of $26 per share of Twitter stock at the high end of the plausible range, with a more realistic offer rolling in around $22 or $23.
At the other end of the spectrum is, of course, what Twitter thinks it’s worth as an acquisition target.
TWTR: Not Easy to Handicap
The company itself hasn’t cited a specific target figure to the public. Indeed, it hasn’t even explicitly said it’s putting itself up for sale. The buzz is, however, Twitter thinks it’s worth at least $30 billion to a buyer. That valuation implies TWTR is worth 60% more than its current value in an acquisition scenario.
Twitter clearly thinks highly of its potential, even though it has yet to come close to realizing it.
Working against any buyout valuation is — as Bloomberg’s Sarah Frier brilliantly put it — the fact that any buyer would have a long “to do” list, fixing what was broken. Remember, although it’s growing well, Twitter has only generated $2.5 billion worth of revenue for the last four quarters, and lost more than $400 million in doing so. Even at a high-end valuation of six times revenue (never even mind the habitual losses), the company is arguably only worth $15 billion.
More often than not, the “right price” is somewhere in the middle of the two most extremes. In this case though, the most realistic price is somewhere closer to the low end of the ranges discussed. No company is going to offer anything north of the $34 per share Twitter reportedly says it’s worth.
Bottom Line for TWTR Stock
Is Twitter going to be acquired? Probably.
But, anything beyond that regarding a price and timeframe is merely speculation, as was Friday’s suggestion that bullishly catapulted Twitter stock before most investors (or analysts) had a chance to think things through. With the benefit of retrospect, it’s easier to see that TWTR doesn’t have a lot of extra fiscal value to unlock, even if it was in more adept hands like those of Alphabet or salesforce.com, and even to some degree, Disney.
In other words, Twitter stock is still nothing more than a coin toss.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
