Not Even Twitter's Solid Earnings Beat Can Make It an Attractive Takeover Target

Twitter Inc. (TWTR) is starting to show signs of life again, with a modestly growing user base, improving ad business and a leaner balance sheet that could make profitability possible in the near future. 

Wall Street seemed happy with the company's better-than-expected third-quarter results. Shares of Twitter jumped 18% on Thursday (marking the fifth-largest gain in the company's history) and jumped another 6.7% on Friday. The stock has surged 34.2% so far this year, compared to the S&P 500's more modest 15.2% gain. 

It's great news for the micro-blogging platform that has been staring down at an otherwise murky future, marred by concerns that it can't attract new users or advertisers, despite all the publicity associated with being President Donald Trump's favorite communication tool. As Stifel analyst Scott Devitt noted, Twitter's audience and business are showing more signs of stability than they have "in quite some time." 

With Twitter's outlook improving, it might cause investors to wonder whether it could once again become an attractive takeover target. Last fall, Twitter was supposedly courting suitors from Silicon Valley and beyond, with Walt Disney Co. (DIS) , Alphabet Inc. (GOOGL) , Apple Inc. (AAPL) and Salesforce.com Inc. (CRM) all said to have expressed interest. 

Twitter trades at a discount to its peers, with a low enterprise-value-to-revenue multiple of 5x, noted Tigress Financial CIO Ivan Feinseth. By comparison, Facebook Inc. (FB) trades at a much higher multiple of 13.9x. The company would be a bargain for any tech or media giant that might be sizing it up. 

But that's unlikely to happen anytime soon, according to several analysts. 

Twitter CEO Jack Dorsey

To start, not much has really changed. Twitter did squeeze past Wall Street's expectations for the quarter, but its overall business is still in pretty bad shape. Overall sales, as well as ad revenue, continued to sag lower year-over-year. Twitter's guidance also implies that fourth-quarter revenue will be down again. Monthly active user growth has remained practically flat for the past year, both in the U.S. and internationally. 

Future profitability is mostly a result of cost-cutting measures, noted Wedbush analyst Michael Pachter, not because Twitter's business model is suddenly making money. 

Twitter might become an acquisition target if it could build a better value proposition for advertisers, said Tigress' Feinseth. The company connects advertisers with consumers who are definitely interested in their products, but it can't provide the holy grail of targeted advertising -- users who could be interested in a product, but haven't discovered it yet, Feinseth noted. That high-value data is what Facebook specializes in and is part of the reason why it's grown to become a digital advertising juggernaut. 

"Until they can do that, Twitter won't be attractive to acquirers," Feinseth explained. "Twitter's market cap is about $16 billion. You'd have to think about the level of monetization to justify that purchase." 

Monness, Crespi, Hardt analyst James Cakmak reached a similar conclusion. Twitter is clearly demonstrating user growth, but until it can demonstrate that its turnaround is sustainable, a "viable acquirer" may not be in the cards. 

"Amid lackluster revenue, Twitter is managing to change the story with a massive EBITDA surge," Cakmak said. "This may very well facilitate patience on revenue, but it doesn't change the underlying concerns over the business."

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Source: Not Even Twitter's Solid Earnings Beat Can Make It an Attractive Takeover Target