- Twitter continues to surface in M&A chatter. While the rumors pertaining to News Corp seem unrealistic, investors should anticipate a base to form for Twitter shares due to M&A speculation.
- Twitter has set a low bar for analyst expectations, which creates an easy pathway for a series of earnings/sales beats.
- Twitter remains a buy, and while I can acknowledge the risks, the risk factors are already priced in, so management execution should materially alter sentiment going forward.
The recent rumors of News Corp's potential takeover of Twitter created another chapter in the Twitter buyout saga. Of course, the rumors were far-fetched and a recent report from Reuters more or less refuted the chatter earlier in the day, but I guess people were looking for any reason to get back into Twitter (NYSE:TWTR) after a morbid week of selling.
If anything, the longs are willing to threaten the shorts with absurd speculation whenever the tape gets really ugly, so don’t be surprised if Twitter makes repeated appearances on CNBC, Re/Code and etc. Twitter still trades at heightened valuations when compared to other media properties, and I anticipate a wave of consolidation among the old-guard news companies as opposed to widely speculative gambles on social media. But, after reviewing New Corp’s balance sheet I come away with the impression that News Corp does have the financial means to acquire Twitter. However, I just find it highly impractical from a strategic business standpoint.
News Corp continues to struggle, as its business model is long overdue for a major revamp. The company needs to reposition its publications online for subscription revenue, and I find it dubious that News Corp will find meaningful lift in terms of ad impression even if it were to integrate into Twitter’s MoPub ad marketplace. In other words, the potential synergies just aren’t there to either lower costs or improve ad CPMs. Furthermore, News Corp learned a hard lesson the last time it acquired a social media property, as it paid a high premium to acquire MySpace only to convert it into a failed music property. Myspace isn’t really relevant, and I doubt Twitter will want to partner with News Corp given their poor track record as a parent company.
Nonetheless, I still anticipate a path to recovery in terms of DAUs/MAUs upon implementing longer tweets, which has nice synergies with Twitter Moments and Google Search. I believe Twitter’s issue is largely due to the lack of quality content, and assuming those factors meaningfully change in the next fiscal year, the company’s audience metrics will improve.
According to Morgan Stanley:
For TWTR: Our $18 PT assumes that ad impression growth will decelerate in 2016 due to weak engagement (MAUs and time spent per user) and incremental advertiser demand. Mobile MAUs grow at a 8% CAGR from '16 to '19E. Mobile eCPMS grow at a 6% CAGR from '16 to '19E. Total mobile impression growth slows from an estimated 54% in 2016 to 9% in 2017, growing at a 8% CAGR from '16 to '19. Mobile ads/user/day stagnates and in all, total advertising revenue grows at a 15% '16-19 CAGR. Downside risks are higher than anticipated MAU growth or time spent on Twitter could drive meaningful upside to our advertising revenue estimates and a potential re-rating of the stock.
While I respect Morgan Stanley, they too acknowledge that there could be upside to advertising revenue. But there’s no denying that the long-term forecast reductions reflect the sentiment and recent weakness in price action. I anticipate continuing merger speculation to put a healthy floor underneath the stock with room to push the price above $20. The stock will likely recover assuming a broader recovery in equity prices, and a string of quarterly revenue beats. But without those beats, the broader re-valuation in financial models on the Street captures the recent weakness in price action.
To conclude, investors should consider buying Twitter at these lower levels. Yes, there are risks to ad-monetization and user retention, but at this point those factors have been priced into Twitter's stock price. I believe the underlying catalysts will create a compelling recovery story as we progress through the year. Furthermore, I find parallels to Facebook (NASDAQ:FB) and Twitter following IPO, and find comparisons to MySpace wildly impractical.
You’re welcome to disagree, but I continue to reiterate my buy recommendation on Twitter.