Readers of my column know that I am not fond of Twitter Inc (NYSE:TWTR) as a business. TWTR stock is not what I would invest money in, as far as hoping it goes up solely as a result of business execution. The company keeps losing money. It has this massive base yet it can’t effectively monetize it.
Still, it has $2.5 billion in net cash, and generated about $300 million in trailing-12-months positive free cash flow. So it isn’t going bankrupt.
The big question is what the heck is going to happen with TWTR stock? It’s uncomfortably valued at $12.4 billion, off its low of about $9 billion.
My guess is that TWTR on its own is going nowhere as far as profits are concerned. However, any number of companies with deep pockets are going to look at its user base and find value.
That’s the only reason it trades where it does, I think. Some idiot is going to overpay to acquire all of TWTR stock.
The question is when.
TWTR Stock Plays
So there are a few ways to play Twitter. The first is to simply go long. That some company shells out $30 per share (at least) seems to me to be a likely scenario.
The main risk is that this buyout never happens, or you tie up your capital for a long time and don’t earn a great annual return. The other risk is that you go long and the stock drops. You could then buy it even lower and average down.
You could buy some long-term call options. This is where you buy the right — but not the obligation — to buy 100 shares of Twitter at a particular price on or before the contract’s expiration date.
Another approach (and one I am considering) is to sell naked puts against TWTR stock. In this case, you are selling the right for another investor to force you to buy Twitter shares at a given price on or before a given expiration date.
Why do this? Because you get paid for it. Thus, if you get paid $2 for selling the contract, and the stock is put to you at $20, you have effectively bought it at $18.
Thus, it is a way to potentially buy into TWTR stock at a lower price, and to generate some income in the event that the stock rises from its present point.
If Twitter stock gets put to you, then you own it at an effectively cheaper price than today. If the stock isn’t put to you, then you collect some money but give up the chance of a higher stock price.
Finally, you could combine these strategies. You could sell naked puts, and take that money to buy calls. Thus, if TWTR stock falls, it will be put to you and you will own it. If there’s a sudden buyout and Twitter rockets higher, you own the calls.
Lawrence Meyers is the CEO of PDL Capital, and manager of the forthcoming Liberty Portfolio stock newsletter. As of this writing, he has no position in any stock mentioned. He has 22 years’ experience in the stock market, and has written more than 1,600 articles on investing. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.
