When Twitter (TWTR) CEO Dick Costolo announced earlier this month that he was resigning as of July 1, it underscored the turmoil that TWTR stock has faced over the past year.
This once high-flying stock is still trying to make money (or “monetize” itself, as analysts like to call it.) Launched in 2006, it has never turned a profit — at least not on a GAAP basis.
Now, however, TWTR is awash with rumors that at least one major tech company is exploring adding Twitter to its team.
But is Twitter really about to be acquired?
Why TWTR Stock Has Languished
In late April, first-quarter earnings revealed Twitter’s underlying problems. Despite raising its revenue to $436 million, a whopping 74% spike over last year, it still lost $162 million. It also attracted 302 million users — an increase from the 288 million who visited the site last year. Some analysts, however, lamented the fact that Twitter’s user growth was slowing down.
Moreover, TWTR stock has been sinking this year. Shares hit a high around $56 right before its Q1 earnings report, but sunk 30% in short order. Now Twitter stock sits some 40% off that high, including a brief relief rally following Costolo’s exist that also fizzled out.
All of these bad tidings are, in a way, encouraging news for investors.
When tech stocks like TWTR show weakness, the sharks and investment bankers swoop in and start investigating a potential acquisition. A host of possible suitors are likely exploring whether Twitter is a good fit, whether the price and the premium for the stock are worth the investment, and nailing down what it could do to ensure that Twitter spikes revenue and turns profitable.
For example, eMarketer reported that of the growing $19.2 billion mobile Internet ad market, Google (GOOG, GOOGL) attracted 36.9%, Facebook (FB) 18.5% and Twitter (TWTR) a paltry 3.6%. What could the new owner do to boost Twitter’s market share to 5% and then 10%?
Some analysts are discouraged by the fact that Twitter brought back Jack Dorsey, who had been its original CEO. Dorsey will currently serve as interim CEO of Twitter while continuing as CEO of Square, the payment solutions firm.
But by holding down two CES slots, he can’t devote full attention to fixing what needs to be addressed at TWTR.
Moreover, Twitter has been criticized for serving too many purposes and lacking a definitive focus. So of its 300 million users, some enthusiasts come for the news updates, some for the gossip, and some for professional news. Hence some analysts say it has spread too thin and needs a more defined focus.
But who could gobble the $23 billion Twitter up?
One leading acquirer sitting on a wad of cash is Google (GOOG), which has close to $60 billion in reserve. Moreover, Google and Twitter already have a partnership. Twitter hired Google’s DoubleClick advertising platform to see if it could boost revenue. Clients can book Twitter via DoubleClick Bid Manager, which makes it easier to do. Google too could use Twitter’s feeds to provide real-time search.
The other candidates are the 800-pound gorillas in the tech arena — Facebook, Microsoft (MSFT) and Apple (AAPL), all of which have been rumored to show some interest. Of the trio, Facebook is the most likely acquirer. It was rumored to try to buy Twitter two years ago, and it still could use its data feeds.
Still, of them all, Google seems the likeliest — a sentiment displayed by MKM Partners analyst Rob Sanderson. The analyst downgraded TWTR stock yesterday, saying (emphasis mine), ““We see no catalyst for improving sentiment in the next two quarters (besides a possible GOOG bid).”
He went on to say that Google was the “natural acquirer if there is one,” given both Google’s giant cash hoard and the company’s struggles in the social space.
Bottom Line
If Twitter hires a new full-time CEO and opts to go it alone, it must add to its user base, close in on Facebook’s whopping 5 billion clients and create more revenue-producing tools. That’s a tough row to hoe, and doesn’t inspire much confidence in the potential upside of TWTR stock.
However, given that Twitter is close to its yearly low at under $35 — and given that a Google buyout is a very real possibility — I rate this as a speculative buying opportunity.
As of this writing, Gary Stern did not hold a position in any of the aforementioned securities.
