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Is Twitter Inc (TWTR) a Buyout Target Like Yahoo?

Twitter Inc (TWTR) shares edged higher amid speculation by an analyst who thinks the company may make an attractive buyout target following its disappointing earnings report.

Is Twitter Inc (TWTR) a Buyout Target Like Yahoo?This isn’t the first time Twitter has been floated as a good target. Certainly there’s no denying that the micro-blogging platform is being left in the dust.

Twitter, Yahoo Left Out in the Cold shared their weekly comic with ValueWalk last week, and it certainly is timing. It shows Apple Inc (AAPL), Google (GOOG) and Facebook Inc’s (FB) management toasting their success with Yahoo! Inc. (YHOO) and Twitter left out in the cold. Yahoo figuratively shows its age with CEO Marissa Mayer hobbling away from the party using a cane, and Twitter… Well, Twitter was never even invited to the party as its bird hovers outside the window, peaking in to see what’s going on.

Will Google or Microsoft come to Twitter’s rescue?

In a report dated July 27, FBN Securities analyst Shebly Seyrafi reiterated his “outperform” rating on Twitter but trimmed his price target from $20 to $19 per share. He’s one of a very few analysts who have the equivalent of a “buy” rating on the struggling social media network. He sees the potential for a buyout as growing and notes that as Twitter’s share price declines, its buyout value becomes more and more compelling.

Further, he said a greater and greater portion of the company’s value is coming from its take-out value.

He noted that LinkedIn’s and Yahoo’s buyouts followed “relatively poor” earnings results in both cases. Additionally, he believes Microsoft Corporation (MSFT) and Verizon Communications (VZ) could both derive value from Twitter, although he sees an even greater value for Google parent Alphabet.

Is Twitter the next Yahoo?

So this begs the question: Is Twitter the next Yahoo? If so, the implications are two-fold. Of course in the near term, it means a road that becomes increasingly difficult, both for the company itself and its investors. In the long term though, it could mean a buyout—if Seyrafi and others are correct.

Morgan Stanley (MS) analyst Brian Nowak took the fully bearish side of the argument about Twitter potentially being the next Yahoo. The micro-blogging platform finally beat expectations for monthly active users, but the problem is that advertisers have begun to throw in the towel as it is having a difficult time getting them to spend money on a platform that has shown zero to lackluster growth.

Nowak highlighted the similarities between Twitter and Yahoo and the difficulties encountered when it comes to trying to fix ad-based Internet platforms. He noted that Yahoo’s display ad revenue started falling in the fourth quarter of 2011 and has been struggling since then, and Twitter’s third quarter guidance implies a deceleration in ad revenue growth to 4%. This implied deceleration comes despite greater inorganic benefits from the NFL live-streaming deal, Rio Olympics and political advertising.

He continues to rate Twitter at “underweight” and cut his price target to $13.25 per share.

TWTR’s buyout valuation similar to Yahoo’s?

So how much might a suitor pay for Twitter in a buyout situation? Nowak pegs the valuation at five times his firm’s bear case 2017 non-GAAP EBITDA estimate, which is about comparable to the value Verizon paid for Yahoo, he said.

Oppenheimer Holdings Inc. (USA) (OPY) analyst Jason Helfstein and team considered the potential of a buyout as well in their July 26 report, but they believe suitors will only be interested if Twitter’s live-streaming deals actually work in driving engagement. He suggests that a “large media company” might buy the micro-blogging platform for ten to 13 times, compared to the 12.6 time was trading at following the earnings release last week, if live video drives engagement.

Additionally, he believes the micro-blogging platform will try to maximize its EBITDA/ free cash flow to drive a sales price that’s as high as possible.

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