Can A Strategic Buyer Turn Twitter Around?

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TWTR: Twitter logo
TWTR
Twitter

Rumors of a takeover sent Twitter‘s (NYSE:TWTR) stock soaring a while back, when it jumped more than 10% from an all-time low of $15.50. While the stock price is still struggling and takeover rumors have been dispelled, at the current price, the company’s market cap is around $12 billion which makes it an interesting target for cash rich companies, given its sizeable user base of 300 million.  In the last three months, Twitter’s stock price declined by more than 40% and our $35 per share price estimate  for the company is almost double its current stock price. We expect Twitter to grow its user base and ad revenue at a steady pace over our forecast period on the back of the initiatives being taken by the company management and its international expansion.  Yet the market, it appears, has yet to reflect these prospects and the share price remains in the doldrums.

See our complete analysis for Twitter

Will Initiatives To Expand User Base Pay Off ?

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While Twitter has been struggling to grow its number of users, company management has taken several initiatives in the recent past to address this issue.  Twitter started experimenting with a new order of timelines based on relevance rather than the reverse chronological order. The “Moments” feature was launched in 2015 which curates the best set of tweets around live events and news. It was reported that the company might do away with the 140 character limit for its tweets and allow longer tweets to improve user engagement.  According to a survey the average time spent by a user on Twitter is 17.1 minutes which is much lower compared to the 42.1 minutes on Facebook. [1]. The company’s 320 million active users are dwarfed when compared to the 1.55 billion users of Facebook, which indicates that Twitter is less popular social medium. While in December 2015, the company finally announced its plans to tap the passive user base of nearly 500 million users who access tweets without logging into Twitter, growth in active users would be key to drive its revenues in future.

Twitter has a 21% penetration in the U.S. and around 8% in international markets, compared to the 70% and 43% figures respectively for Facebook, indicating the huge growth opportunity. (Read How Does Twitter And Facebook’s Penetration Compare In Different Markets). However, the company needs to take bold initiatives to grow its user base and increase user engagements. In Q3 2015 Twitter’s user base was 320 million compared to 316 million in the previous quarter, indicating a very slow rate of growth. For the past two years, Twitter has witnessed a declining rate of growth in its users, which is the major cause of concern for the company.

Bleak Growth Prospects Leading To Market Discount

While Twitter’s management appears to be working hard on driving user growth, a tangible advance in its prosepcts has yet to occur. The stock price reaction to takeover rumours indicates that the market does not have faith in Twitter’s current management’s ability to drive growth in the company.  Twitter’s market cap per user is almost 1/4th that of Facebook, primarily because of its slow user base growth coupled with low margins and free cash flows. (Read Twitter’s Valuation : What is Its Current Discount In The Market Relative To Facebook And LinkedIn).  Given its growth potential Twitter does appear to be an attractive buy for a strategic investor, at its current valuation.

While the company management is working on user growth and ways to generate higher advertising revenues, the success of these initiatives will be key for Twitter’s revenues in future, inn our view.  If the management is unable to implement these effectively, a management change by way of a strategic buyer could offer an alternative solution.

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Notes:
  1. This is How Much Time We Spend On Social Networks Every Day, Social Times, November 2014 []