It appears we’re at a point where Twitter Inc (NYSE:TWTR) is going to have to go it alone, at least for a while. Twitter stock went from $18 to $25 last September based on M&A hopes, and the speculation continued into December. But Walt Disney Co (NYSE:DIS) said no to a takeover of TWTR. Salesforce.com, Inc. (NYSE:CRM) said no. Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL) wasn’t interested. Neither was private equity, or apparently anyone else.
That indifference came despite multiple media leaks that made it clear Twitter CEO Jack Dorsey was willing to sell — for the right price.
As a result, TWTR stock closed 2016 at a five-month low, though shares have risen modestly in the beginning of 2017. The bull case for Twitter stock now seems to be based on a potential turnaround. After all, Twitter can use the notoriety from President-elect Donald Trump’s endless (and influential) use of the platform to boost user growth and engagement. Advertisers will increase spend, and Twitter can then cut costs to drive the profits it needs for someone — anyone — to want to buy the company out.
TWTR Stock Looking Forward
I’m highly skeptical of Twitter’s chances, however.
There are fundamental issues with the company, and with TWTR stock. Twitter executives, including Jack Dorsey, have admitted to pricing pressure on ad rates, notably on the Q2 conference call. There’s the fact that Twitter isn’t profitable. According to the company’s calculation of adjusted EBITDA, Twitter has generated $728 million in adjusted EBITDA over the past twelve months. But that number excludes stock-based compensation.
Over the same period, Twitter has issued $635 million worth of stock and stock options to employees and executives. That means the true pre-tax earnings for Twitter are under $100 million — and yet TWTR stock still is worth over $12 billion, about 130x that figure.
With the company expecting more than $360 million in capital expenditures this year, according to its 10-Q, whatever cash it is generating isn’t coming from its business. It is coming from the issuance of Twitter stock.
The one silver lining for TWTR stock at the moment is that there are fewer executives to receive those shares. Twitter has seen an exodus of managers like no other company in recent memory. CNN writer Seth Fiegerman captured it perfectly (in a Tweet, of course):
So there’s a key problem with hopes that a Twitter turnaround will boost Twitter stock: there are few executives left to lead that turnaround. Many of those who remain, including Jack Dorsey, already are doing double duty (at least).
For a company that needs to be cutting edge and responsive to users and advertisers, that seems an insurmountable problem.