What Would You Get Buying Twitter?

In Business, Finance
Twitter Stock Chart

Over the last several weeks, there has been speculation all up and down Wall St. about the potential sale/acquisition of Twitter.  There have been rumors of companies ranging from Google to Salesforce to Disney urging/speculating that they would make an offer for the social media giant.

The first thing that needs to be understood about Twitter is that their market value (as of about noon on 10-17-16) is about $11.7B, so whatever way that you look at companies that would be on your wishlist has to start at that point.  If you don’t come up with an offer of at least that — the stockholders would have to bet that their investment will be declining to accept anything less.  Let’s take a look at some market metrics for the stock.  First, the stock is down over 45% in the last 52 weeks (that would be a year).  They generate a lot of revenue and there’s good growth.  According to their last 10Q filing, in the first half of the year they generated $1.2B in revenue, up 28% from 2015.  This revenue generated a loss of about $200M, a significant improvement over the first half of 2015 where the loss was $300M.  The Balance Sheet is in very good shape with $4.4B in current assets and another $.75B in property & equipment.

From the perspective of the previous paragraph, the company is in good shape.  Of the $11.7B in value, about $5B of that comes off the top since those are really assets that are predominantly cash and equivalents which means that you really have to come up with $6B in valuation on the existing business.  One of the things that small to mid-size business owners know is that you pay for what the acquired company has done NOT what you are going to be able to do to/with the company after the acquisition.  A really great nugget that Twitters’ management made sure to highlight is the fact that 89% of their revenue is generated from users using a mobile device.

Right in the beginning of the management discussion section of the 10Q is where my concern begins.  They have a metric that is discussed called the MAU, which represents Monthly Active Users.  In the June quarter, they reported 313 million MAUs, barely up from the 310 reported in Q1 and only a little greater than the 304 million in Q2 from 2015 which is an increase of about 2.9% year over year.  MAUs in the key US market have barely moved from 65 million in Q215 to 66 million in Q216, which is only 1.5%.  Their international growth has been better growing from 239 million to 247 million MAUs, which is 2.5% growth.

Another set of information that’s important to the company is how ofter people ‘Tweet’ things.  The peak usage on Twitter looks like it was back in August of 2014 when there were 661 million tweets in one day during the 2014 World Cup.  In January of 2016, the total was a little over 300 million.  In an 18-month time span the number of tweets were cut in half, as depicted in the chart below from a Business Insider piece back in January.

Daily Tweets
Daily Tweet Chart – from Business Insider

What you get with an acquisition of Twitter is a user base that’s not increasing very much, but the company is doing a much better job of monetizing the user base.  Their revenue increase of 28% is really great and shows that there’s some real potential with the audience.  Much of their ad revenue is what is called performance-based revenue, which means that in order for money to be collected (i.e. revenue), someone needs to click on the ‘ad’.  This is really where most online advertising is going so it’s not a terrible thing.  The thing that always worries me about points like this is that the user experience is typically one of the first things to go when ‘managing the quarter’.  What i mean by this is that when management feels that they need to generate more revenue, they can increase the ratio of ads as compared to the number of tweets that a user will see when using the platform.  This generally works up to a point before a portion of the audience starts to rebel against a ‘terrible experience’.

You will also get a user base that doesn’t seem to be as interested in interacting/participating in the conversation.  That’s one side of this, but the other is that possibly the audience is just a little more passive than before with a different type of Tweet happening.  The 3 other stats (for the most part) have stayed fairly steady over most of the period depicted above.  This again is not a terrific picture, but the increase in monetization is a good thing.

So from the above, the financials are good but the user based metrics aren’t terrific.  So what are you getting from Twitter?  In order for a company to become a really important company, the company has to actually DO something and serve a purpose.  So looking at the big online and online media companies today we have Google, Amazon, Apple, Facebook and does Twitter actually fit into this statement or are they just RC Cola to a Coke or Pepsi in Facebook.  Google represents search.  Amazon represents commerce.  Apple represents hardware and music.  Facebook is the social powerhouse.  So is there really room for 2 social power houses?  As an online media person, one of the great things about Twitter is that you can know about things that are going on VERY quickly.  It’s designed for users to be able to see breaking news quickly (via hashtags) and over time, analysts can visualize trends in news and opinions that may otherwise not be available.

To me the key difference between Twitter and Facebook, both social media platforms is that Twitter is more ‘focused’ on breaking news and depicting/tracking trends in consumer and individual awareness than Facebook is.  Facebook allows people/users to keep track of what’s happening with friends and with companies/publishers that they want to follow/like.  It’s really hard to say whether FB users would change their behavior on the platform to really threaten what Twitter has but Twitter is not really in a strong position from a market perspective because the user metrics in the FB world really set them ahead of anyone else in the space.

Twitter has a place in the world, but in all honesty, I’ve never really understood the fascination with the platform in the scheme of things and the only reason I’m moderately active on Twitter is because I get a little traffic from it and because I get the instant gratification of seeing people follow me, retweet, etc things that I write and publish.  If I had the money or was in a position to think about purchasing Twitter, I’d follow what everyone else has already done — and say that ‘I pass’.  I don’t think there’s significant upside that can be added on to make the acquisition really pay off.  $6 Billion is a LOT of money, even to companies that “hide” their profits in overseas tax havens.

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