- Twitter could be Google’s most valuable acquisition if it plays out that way.
- There are several synergies to be exploited by Google in such a scenario.
- It is also an ideal way for Alphabet to deal with the Facebook threat.
The market has been buzzing ever since CNBC broke the story of an impending Twitter (NYSE:TWTR) sale, with big tech majors Alphabet Inc (NASDAQ:GOOG), salesforce (NYSE:CRM), Verizon (NYSE:VZ) and Microsoft (NASDAQ:MSFT) in the hunt. Soon after the news broke out, Twitter stock has rallied by over 21% and I expect the stock to remain at elevated levels because Twitter’s user base can be a huge add-on to any company that is ready to buy it out.
Twitter is struggling financially and its user base is practically stagnant, but it is no Yahoo, where things were slowly moving down every year and recovery looking far out of reach. The biggest problem facing Twitter is the pace of growth, especially when you compare it with the growth of Facebook. Due to this key issue, advertising revenues have been low, resulting in lower cash flow to re-invest in a business that needs a ton of money to keep moving the needle.
Twitter’s decision to put itself up for sale is indeed a good one for the company. The company has been making losses ever since it went public while its rival has been reporting record profits every year. Obviously, Facebook will have lot more money to reinvest in its business, expand its products and run away with more users. The gap between the top two social media players will only widen with each passing year, and there will come a point where Twitter will never be able to compete with Facebook on an even keel. In fact, you can even argue that this is already the case. Quoting from Time.com:
“The company still isn't profitable 10 years on
When Twitter went public back in 2013, it was an unprofitable company. More than two years later, that hasn’t changed. In fact, the company revealed in its annual 10-K filed Feb. 29 that it has lost more than $2 billion in total since launching a decade ago.”
Though there are several companies that are interested in buying Twitter, the little blue bird will find that Google makes the best nest. Of course, Twitter's valuation at the time of the sale will play a big role in the decision, as AmigoBulls editor Vikram Nagarkar pointed out in his recent article, "A Buyout Looks Almost Fully Priced Into Twitter Valuations". That apart, the question is, how much of a premium suitors would be willing to pay? But from a business perspective, Google seems to be the ideal fit.
A robust social media platform is the weakest link in Google’s chain. The company saw the Facebook threat early on and went about creating Google Plus, which never took off the way the company wanted it to. Today, Facebook has already reached over $21 billion in TTM (Trailing Twelve Months) advertising revenues, and is growing that number at a fast pace. Google had over $21 billion in sales coming from advertising in the previous quarter alone, but by 2020, Facebook could narrow the gap and Google could be looking at being “the other big player” in online advertising.
Facebook is a huge competitor to Google’s core business of advertising, and right now, Facebook’s offering stands out as it's a social media platform, while Google is the master of a more impersonal search business. Facebook is already ramping up its video content with the intention of taking on YouTube as a leader in the market, and although Facebook is far away from building a vibrant community such as the one YouTube has, the company is not going to stop. They are going to keep moving the needle, one video at a time. They have brutally exposed the lack of a social media application in Google’s repertoire, and that is exactly the hole that Twitter can fill.
With Twitter in hand, Google will easily expand the reducing gap between Facebook’s and their own ad serving capabilities. If they do buy the microblogging company, it will have a robust ecosystem around its advertising business that Facebook can hardly match: search, video, social media, Android and Chrome.
Also Read: How To Value Alphabet Inc Stock Today?
When you look at it from Twitter’s perspective, just the access to Alphabet’s deep pockets is sufficient. But with access to a billion active YouTube users every month, Twitter can act as a connector for social interaction between users of YouTube. It will be far more comprehensive than YouTube’s comment threads, and it will be an ideal opportunity for advertisers to zero in on as well.
As such, the possible synergies between Google and Twitter are practically limitless, and such an acquisition will benefit both companies tremendously, while at the same time creating a highly effective moat against Facebook. I’ll concede that in any such multi-party bidding contest, the price is likely to go through the roof. However, even if Google ends up paying a huge premium to buy Twitter, it will be a good move.
Of note here is the fact that the Google stock price could take a hit closer to Twitter’s sale, but the further it goes down, the better for investors looking to jump in and buy more for less.