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Why Facebook Might Need to Buy Twitter Inc

Facebook has political problems, and buying TWTR would be a clever way to solve them

By Ian Bezek, InvestorPlace Contributor

Twitter Stock TWTR stock

Source: Shutterstock

Twitter Inc (NYSE:TWTR) may finally deliver for its shareholders. Owners of TWTR stock have suffered through a tumultuous couple of years. In 2015, Twitter stock collapsed from $50/share into the teens, and it has been pretty much dead money since then.

Until this past quarter, anyways. TWTR stock has suddenly roared back to life. Shares have surged from $16 to $25 in recent months. And the gains are continuing. Twitter hit new 52-week highs in Friday’s trading.

Analyst Upgrade Sparks Rally

Richard Greenfield, of BTIG, sparked the latest rally with a research note published Friday morning. Greenfield suggested that Twitter is “too valuable to remain independent.” On top of that, he added that Twitter is in the “early stages of a multi-year turnaround.”

Greenfield raised his target for the TWTR stock price from $25 to $30/share. That gives him the highest stock price target for Twitter on the Street. Furthermore, he sees 20%+ EBITDA growth going forward, compared to single-digit estimates from other analysts.

In any case, the Street as a whole is slowly turning more positive on Twitter. The consensus outlook now sees Twitter returning to decent revenue growth going forward. That, after a period of stagnant revenues that weighed down Twitter’s stock price.

Is Greenfield Right About Twitter Finally Getting Bought?

While the forward revenues and earnings outlooks are important, the key to the story here remains Twitter’s buyout potential. Analysts have suggested that the company has been a buyout target for the past two years. Ever since TWTR stock careened into the teens, observers have speculated that Twitter was about to get taken over.

And yet, so far, nothing concrete has occurred. In theory, it is easy to see how Twitter would be highly valuable to a prospective buyer. Jack Dorsey’s leadership at Twitter has seemingly left a lot of revenue growth opportunities on the table. And an uneven approach to managing political controversies has triggered boycotts and irritated advertisers.

In theory, under the guidance of a more experienced tech operator, Twitter could finally reach its full potential. However, no one has seriously tried to buy the company yet. One theory is that potential buyers were waiting for Twitter to get cheaper. There was certainly no rush to get a bid in as TWTR stock floundered and the other tech companies continued to surge.

Back in Growth Mode

Now though, the deal calculus appears to be changing. Twitter has credible growth prospects again, and both investors and analysts are warming up to the company.

A buyer could have probably offered $25/share and bought the company last year. Now an offer would need to be in the $30s to succeed. One more good quarter, and a takeover would probably have to go off above $40/share. Put another way, companies that have been sitting around watching Twitter have to be thinking of acquiring it now before shares run away from them.

The wave of acquisitions across the media and online content spheres also narrows the field of potential targets. With big targets such as Yahoo! and Twenty-First Century Fox Inc (NASDAQ:FOXA) getting purchased, to say nothing of Time Warner Inc (NYSE:TWX), a consolidation wave is hitting the industry. It’s only natural to think that Twitter could be next.

Facebook’s Got a Problem

One natural suitor would be Facebook, Inc. (NASDAQ:FB). As fellow contributor Joseph Hargett noted, FB stock got hit for a 4% loss in Friday trading. This comes on the heels of a shake-up for Facebook’s namesake platform.

Following the Russian hacking scandal and the preponderance of so-called fake news on Facebook, the company is cracking down. It will sharply diminish the amount of news and commercial content in users’ news streams, while turning the emphasis back to innocuous friends and family posts.

I’ve often warned about the risk to FB stock based on its political problem. Those chickens have come home to roost, and we’ll have to see how the company manages the transition away from being a news-delivery service.

One relatively easy approach for Facebook would be to buy Twitter. It’s no secret that Twitter has achieved a large part of its success by being the watering hole for journalists, politicians and news junkies.

With Facebook eager to get away from political problems on its main platform, this could work out great. Encourage more users to join/migrate to Twitter for the best news and politics coverage. Meanwhile, those users who were tired of news content in their Facebook streams also win.

Facebook can win big in the long run by delivering a separate social media platform for each kind of user. Twitter for news. Facebook for friends and family. Instagram for pictures, food, travel, experiences, and so on.

Trying to serve it all up on Facebook deluged users with too much irrelevant content. Buying and fixing up Twitter is a natural progression for Facebook as it undergoes its post-election scandal changes.

TWTR Stock Verdict

TWTR stock is highly speculative at this point, but it certainly could work out well. Analysts’ takeover calls have been premature.

This time looks different though. With the share price rallying sharply, the pressure is on for suitors to act fast before the stock runs up too far. Other mergers across content providers surely heighten the will to act as well. Facebook in particular has a strong motive to strike now.

And, in the event that no one buys Twitter soon, its standalone prospects are also looking up. If BTIG’s analyst Greenfield is correct, Twitter is about to experience some serious earnings growth again. That would be enough to propel TWTR stock higher even without a takeover offer.

That said, don’t play it too aggressively. Twitter is a turnaround stock, and it has let down its investors time and time again. Hopefully this time is different, but don’t count the chickens just yet.

At the time of this writing, the author held no positions in any of the aforementioned securities. You can reach him on Twitter at @irbezek.

Article printed from InvestorPlace Media, https://investorplace.com/2018/01/why-facebook-might-need-to-buy-twitter/.

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