Twitter Inc (NYSE:TWTR) stock popped Wednesday on two drivers — the recent Microsoft Corporation (NASDAQ:MSFT) buyout of LinkedIn Corp (NYSE:LNKD) and its major investment in SoundCloud.
But how is a Hail Mary and hollow speculation worth another 6% — or approximately $600 million — spike in TWTR stock?
Maybe this is too harsh, but right now it seems like it’s in Twitter’s DNA to disappoint investors. It has never done anything to justify giving it the benefit of the doubt on such a deal, and nary has a buyout rumor ever gone to even serious discussions.
Per the SoundCloud deal: True, a $70 million stake — which values the streaming music service at $700 million — isn’t going to break TWTR if it has to write it off one day. The balance sheet is solid and it’s cash-flow positive. Twitter can easily afford this transaction.
It’s just not clear this is the way to fix Twitter’s growth and monetization problems. SoundCloud has a long way to go before it proves it can compete in an oversaturated marketplace.
Apple Inc.’s (NASDAQ:AAPL) Apple Music, Pandora Inc (NYSE:P), Alphabet Inc’s (NASDAQ:GOOG, NASDAQ:GOOGL) Google Play Music, Amazon.com, Inc.’s (NASDAQ:AMZN) Prime Music, Spotify, Rhapsody — the list goes on and on — are all competing for subscribers. Amazon also is likely to dump streaming music on us, too.
SoundCloud’s competitive advantage is that it has become the place to share and disseminate music. It’s wildly popular. But that doesn’t mean the launch of a subscription service is an automatic success, and that’s a big part of TWTR is banking on.
Sure, maybe things will work out, but overhyped failures in the tech sector aren’t exactly rare. A cautious more skeptical view of this deal is just good thinking.
TWTR’s Dead End
Then there’s this sobering reality: Every time Twitter does a deal like this, it’s a reminder that it doesn’t know how to fix the core product. TWTR already tried to tap the river of streaming music with its Twitter Music app and it had to shut it down.
TWTR already has investments in a company that develops apps for live concerts, a mobile computing company and in-store mobile marketing platform.Venture funding is great all, but how do these moves fix Twitter’s real problem of limited appeal?
These investments obscure the fact that there’s something wrong with Twitter at a very basic level. In a world awash in social media, it’s far from indispensable. It turns out that Twitter simply doesn’t have the same kind of appeal as Facebook Inc (FB), Instagram or Snapchat. Surveys show that it is much less popular than the big three for people between the ages of 13 and 24.
That’s why domestic monthly active user growth has hit a wall. Yes, Twitter may have a growing ad business, but that doesn’t much matter if it doesn’t continue to scale.
No, TWTR can’t just sit on its hands as it tries to rejuvenate growth and deliver as a stock. Maybe the SoundCloud deal will turn out to be a savvy move. But it’s not like it’s going to bear fruit tomorrow.
Any part of this jump in TWTR stock that’s being driven by SoundCloud is based on cool factor, not by any level-headed examination of the risks and rewards. It’s a trade on a headline, and it has already passed.
It’s also likely that Twitter is getting some additional juice from hopes that now that Microsoft has ponied up big money for LinkedIn, an M&A spree could be coming in tech — especially for social media companies.
TWTR buyout rumors feel as old as the company itself, and nothing of significance has ever come from idle speculation. If we start to see some concrete names, maybe then we’ll talk.
Otherwise, TWTR stock is just providing ammunition for fruitful short plays.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
