Twitter – Exit strategy pt. II.

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If no one bids then there is much further to fall.

• Twitter has already lost 20% of its value as it’s the Twitter acquirer appears to be becoming an endangered species and I fear that there is much further to fall if no one bids.
• I suspect that two factors have caused reticence on the part of the potential buyers.
  • First: Valuation
  • Twitter has run out of growth as both its user numbers and its revenue growth have flat-lined.
  • Most of its peer group are still growing at a very healthy clip which is the main reason why they are able to sustain such high valuations.
  • Twitter is not growing and at $24.7 a share, its acquirers are being asked to pay at least 6x 2016 EV/Sales and over 50x PER for a company that has no growth.
  • I think this reality has put off many of its potential suitors.
  • Even where it is today, anyone wanting to acquire the company would still be asked to pay around 5x 2016 EV/Sales and 40x 2016 PER.
  • These are nothing like the multiples that are paid for stagnant companies which is why I fear that if no one bids and nothing changes (see below), the shares could eventually test $10 per share.
  • Second: Strategic rationale.
  • While I can see some reason why Alphabet might want to buy Twitter, I can see no reason for Disney or Salesforce.com to jump in.
  • This combined with the fact that Twitter is still struggling with its strategy means that its new owner will have to have a concrete and bombproof idea about how deliver value for its stakeholders.
  • I think that none of the potential bidders have any real idea what they would do with Twitter if they ended up with it which is why there has been considerable discontent expressed by the shareholders of potential bidders.
• The net result is that I don’t think that anyone is going to bid bringing Twitter right back to its original situation (see here).
• Twitter is relying on creating thriving engagement around a media consumption offering which would then drive much more traffic to its platform giving it a much bigger monetisation opportunity.
• However, it is very early days and while some of the early signs are moderately positive (see here), Twitter is very far from being able to use media consumption as a basis for renewed revenue growth.
• Media consumption is a big ask for Twitter as YouTube and Facebook dominate this segment and both Facebook and Alphabet are much bigger and much stronger than Twitter.
• Twitter has a shot at carving out a space for itself in this crowded segment but it’s a long one and I think that success is already priced into the shares.
• As a result, I would continue to view the shares with extreme caution and I can still see potential for $10 per share.
• Microsoft, Samsung or Baidu are better options in my view.