Should Twitter Acquire Soundcloud?

  • Twitter is reportedly considering acquiring Soundcloud which has 250 million monthly active users.
  • The deal is not as attractive as it appears initially, as most users listen to clips posted on other sites.
  • If at all, Twitter should acquire Soundcloud using its overvalued stock, that too, for not more than $1 billion.

Should Twitter Acquire Soundcloud

According to reports, Twitter (NYSE:TWTR) is considering the idea of acquiring Berlin-based Soundcloud, the company that calls itself the Youtube of audio. It is believed that Twitter had considered the option earlier as well, back in 2013. However, after Soundcloud got into tangles surrounding content licenses, Twitter shelved the idea and launched its music app without Soundcloud integration.

Soundcloud has displayed strong user growth. Though regular periodic information regarding the same is not available, the company reported a total user base of 250 million users in October 2013, up from 200 million in July 2013.

Twitter’s user growth on the other hand has been going downhill for about 4 quarters on the trot, until a marginal rebound in Q1 2014. It’s possible that even this marginal turnaround is merely a reflection of seasonality, as Twitter’s user growth typically peaks in Q1 every year. Investors have been dumping the company’s stock after each of its earnings releases since listing, concerned by weak user growth.

Soundcloud does offer membership fee based premium services apart from advertising revenues. However, as per the only source of information we came across about Soundcloud’s revenue, the company earns about $1.5 million a quarter, which is a long way off from that of Twitter’s, in spite of having similar user numbers.

One must note that the user base of 250 million for Soundcloud is the number of people that come across an audio clip and listen to it, and not necessarily the number of registered users or paid users that visit soundcloud.com. However, even if one were to ignore that fact, Twitter’s user monetization seems to be far superior, one that can boost Soundcloud’s revenue generation capabilities. Twitter has shown a constant improvement in its monetization rates, and as we discussed in our latest comparison of Facebook and Twitter, it is better monetization that has driven their strong revenue growth.

On the other hand, what Twitter will happily welcome, is hordes of new users to monetize, making it a mutually beneficial arrangement. More so, since Twitter shut down its music app a month ago.

Acquisition Impact and Twitter Valuation

As per our estimate soundcloud.com has about 50 million unique visitors globally, and about 12 million US visitors, which looks far less attractive than the overall user number of 250 million users reported by the company. After its last round of funding in early 2014, Soundcloud was reportedly valued at $700 million. We would expect Twitter to pay about $1 billion plus for the acquisition, implying a cost of $20 per user, which is quite the norm, albeit still high.

It will be interesting to see what mix of cash and stocks Twitter uses to fund the acquisition. If Facebook’s acquisition of Whatsapp is anything to go by, Twitter might pay for the acquisition using $750 million worth of stocks and $250 million in cash. This implies a stock dilution of just about 4%, considering Twitter’s current market cap of $19 billion.

The erosion of cash is also not very good news, given than Twitter hasn’t been generating too much of a profit even at the non GAAP EPS level. Twitter has a cash and marketable securities of about $2.2 billion, and wiping out $500 million or more from that balance may not be ideal.

As we discussed in our earlier article, we think Twitter is grossly overvalued even after the 20% free fall in stock price. However, if the company can use this overvalued commodity to complete a stock based acquisition with just a 4% dilution in EPS for a 20% jump in users; that might serve investors better.

See our company analysis of Twitter.

To see Twitter’s latest stock price movement, click here (NYSE:TWTR)

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Neither Amigobulls, nor any members of its staff hold positions in any of the stocks discussed in this post. The author may not be a certified/registered investment advisor, and the opinions expressed should not be treated as investment advice. Buying and selling of securities carries the risk of monetary losses. Readers/Viewers are advised to carry out their own due diligence and consult their investment advisors before making any investment decisions. Neither Amigobulls, nor the author have any business relationship with any of the companies covered in this post.

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Comments on this article and TWTR stock

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Virendra Singh Chauhan
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Here is why Twitter must reconsider its decision to back out of the Soundcloud deal. http://www.techinsider.net/reasons-for-t...
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