While I use Twitter, I am not a fan of Twitter Inc (NYSE:TWTR), simply because it’s not easy to love a company that doesn’t make any money and yet keeps raising debt to match its asset growth.
The last time I addressed TWTR stock, I wrote it had “fooled the suckers again.” The shares started the year strong, gaining almost 15% through February 8, but then the earnings came out. That was February 10.
Since then the shares have lost another 12.6%. The market cap has fallen to $10.4 billion. The negative view has become universal, as in Tom Taulli’s latest, where he insists there is no turnaround in sight. Or Josh Enomoto’s suggestion that you put the nightmare to bed.
There may be no turnaround in sight, but there could be a profit coming for someone. Could you be that someone? Let’s see.
Seeking Mr. Profit
Many of the negative moves cited by Taulli seem aimed at stripping the company down to a profitable core. Executives have left. The company has installed machine learning to make finding relevant feeds self-service. And, they have moved to remove “fake news” and abuse from the feeds.
But that’s not all: Twitter has shut down Vine, sold Fabric and is now down to only the main micro-blogging service and Periscope, a live streaming app.
Rather than look for horizontal growth, the company is trying to expand vertically, monetizing the assets it has. Advertising engagements are increasing while the company’s cost per ad is decreasing. This is especially obvious to U.S. users, 20% of the total, because ads run to us represent 60% of the company’s revenues.
The company is also adapting what it learns about U.S. monetization to the rest of its user base. The growth rate on international revenue, from a small base, is faster than that of U.S. revenue.
You can see the result by looking inside the numbers. Cash flow from operations has risen from $162.8 million in the first quarter of last year to $763.1 million in the fourth quarter. Total cash flow fell substantially, year-over-year, but that’s because the company flat-lined its financing. The drain from its investments is decreasing, and that positive cash flow is all from operations. If it can keep things moving that way, and there seems no reason why it can’t, they might break even one day.
What good would that do?
Another Buyer is Possible
I hinted at what may come next in my February piece. Sure, it’s stupid for a Walt Disney Co (NYSE:DIS) or even a Facebook Inc (NASDAQ:FB) to buy a money-losing service, but once Twitter approaches break-even an interesting auction could develop.
What if Tencent Holdings Ltd (OTCMKTS:TCEHY) made a bid for Twitter? The Twitter service might make a good international outreach, and a good accompaniment to its existing WeChat service. Or consider Weibo Corp (ADR) (NASDAQ:WB), sometimes called the “Chinese Twitter.” A break-even Twitter might look like a nice bolt-on for that company.
So, maybe in October, around the time the company reports third quarter earnings, Twitter puts out a news release describing an agreement to sell the company to Weibo for, say, something like the present market cap of $10.4 billion?
No one likes Twitter on Wall Street, it’s still not going to see a profit in the first or second quarter of this year, and the stock should decline in value during that time, so such a bid might be rationalized by then.
Do you think the administration is going to like seeing Radio Trump go into Chinese hands? I don’t think so. I think another bidder comes in then, an American bidder, and (shall we say) trumps any Chinese bid.
A little quiet accumulation of TWTR stock over the next few months puts you in position to take advantage of this. It’s highly speculative, but my guess is that this is what Twitter’s management is moving toward. They’re looking to a sale.
Dana Blankenhorn is a financial and technology journalist. He is the author of the political polemic Saving Trumpistan, Restoring Democracy, available now at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing, he was long DIS and FB.
