Twitter – Exit strategy.

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Bid frenzy offers a great exit point. 

• Without big success in media consumption, Twitter offers very poor value to potential acquirers at $23 per share (EV $14bn) giving holders every excuse to get out.
• Interest around Twitter is increasing with Alphabet now also seeming to take a look at Twitter adding to Salesforce.com, Disney and a host of others.
• I can see two types of companies where it could make strategic sense to acquire Twitter but at 5.6x 2016 EV/Sales and 46x 2016 PER, achieving value for acquiring company shareholders will be difficult.
  • First: Ecosystems.
  • Twitter is dominant in its niche of Microblogging and is present in Instant Messaging and Media Consumption although it is far from dominant in latter two.
  • Consequently, for an ecosystem looking to increase its coverage of the Digital Life pie, acquiring Twitter could make some sense.
  • Second: Broadcasters.
  • I have long believed that Twitter is effectively a broadcaster.
  • In the developed world, most events and news break first on Twitter and many institutions use the platform to broadcast their message to the world.
  • Consequently, I can see far more sense in someone like Fox or Time Warner buying Twitter than I can Salesforce.com or Disney.
• Twitter has two assets that are very valuable.
  • First: Its social graph.
  • Because Twitter users choose to follow certain topics, Twitter has a much more accurate picture of what the user’s interests are and therefore it can target with laser accuracy.
  • This allows it to charge a high price for its advertising inventory which is responsible for its superb ability to monetise the traffic that comes to its service.
  • However, this will not last for ever as the likes of Facebook and Google are all working hard on their AI algorithms and at some point they will be able to deduce user interests to the same accuracy from the much less specific data that they generate.
  • Second: 313m active users of which 82% are on mobile.
  • Twitter already has enough users to meet RFM’s definition of a successful ecosystem.
  • The problem has long been that it covers only a tiny slice of the Digital Life pie and consequently, its revenue and growth potential is limited (see here).
  • This is why I do not consider it to be an ecosystem and why growth has round to halt despite excellent execution on monetisation
  • In short, there is no traffic left that has not already been monetised.
• To make a success of Twitter the buyer has to find a way to combine Twitter with its existing business to enable Twitter user numbers and revenue to begin growing again.
• This will be much harder than it sounds and I suspect that those who are more familiar with this industry are likely to have a look and then decline to bid.
• Hence, if Twitter is to be sold, it is likely to go to a newcomer in this space such as a broadcaster or perhaps Disney if it can work out why it would need this asset.
• For existing shareholders, the frenzy has driven a substantial rally in the share price offering an excellent time to exit as I still think that Twitter remains meaningfully above fair value.