This Is Why Twitter Stock Is Going Crazy
Twitter Inc (NYSE:TWTR) stock has mostly been in the doldrums since last summer. On Monday morning, though, it shot up seven percent. Does that mean Twitter stock is going to make a comeback?
To answer that question, let’s first take a look at the catalyst behind Twitter stock’s surge—the Microsoft–LinkedIn deal.
On Monday, Microsoft Corporation (NASDAQ:MSFT) announced that it was acquiring online professional network LinkedIn Corp (NYSE:LNKD) for $26.2 billion in cash. It will pay $196.00 per LinkedIn share, a 50% premium over the stock’s closing price on Friday. (Source: “Microsoft to Acquire LinkedIn,” Microsoft Corporation, June 13, 2016.)
Obviously, the announcement was tremendous for LinkedIn as LNKD stock skyrocketed 48%. At the same time, it also made investors wonder whether Twitter—another social media company—could become the next acquisition target of some tech giant.
Despite changing its app category from “social networking” to “news” to improve visibility, Twitter is still a big player in the social media industry. In fact, on the surface, Twitter looks quite appealing to anyone who wants to get into the social media business.
Twitter’s average monthly active users (MAUs) totaled 310 million in the first quarter of 2016. This compares to LinkedIn’s 106 million monthly active unique visitors. Moreover, as Twitter stock went downhill, its market cap has also shrunk to a little more than $10.0 billion—not a huge number considering Microsoft paid $26.2 billion for LinkedIn.
Of course, there is much more going on at these companies than just MAUs and market caps. One thing Twitter does not have is LinkedIn’s revenue-generating model. Many LinkedIn users—especially human resources (HR) professionals—are willing to spend money on the platform. In the first quarter of 2016, the company’s “Talent Solutions” revenue improved 41% year-over-year to $558 million. (Source: “LinkedIn Announces First Quarter 2016 Results,” LinkedIn Corp, April 28, 2016.)
Twitter, on the other hand, does not have that luxury. While its monthly user statistics are more impressive than LinkedIn’s, Twitter doesn’t have paying users. Instead, the company makes most of its money from advertising. In the first quarter of 2016, advertising accounted for more than 89% of Twitter’s total revenue. (Source: “Slide Presentation,” Twitter Inc, April 26, 2016.)
The good news is that Twitter recently managed to get going again. At the beginning of this year, investors were worried because the company showed stalling user growth quarter-over-quarter. This time, though, Twitter’s 310 million MAUs represented not only a three-percent year-over-year improvement, but also an additional five million users compared to the previous quarter. (Source: “Twitter Q1 2016 Shareholder Letter,” Twitter Inc, April 26, 2016.)
Don’t get me wrong; Twitter’s userbase is nowhere near industry-leading levels. Facebook Inc (NASDAQ:FB), for instance, has 1.65 billion MAUs—over five times that of Twitter’s. Still, a userbase of 310 million would be attractive to anyone who wants a piece of the action in the social media business.
It also helps that Twitter has put a lot of effort into improving its monetization. In the first quarter of 2016, the company’s ad engagements skyrocketed 208% year-over-year. This helped drive Twitter’s ad revenue up 37% year-over-year to $531 million.
Note that companies like Twitter and LinkedIn are no longer startups anymore. Early investors might be willing to take some losses. But at this point, anyone who’s interested in buying a multi-billion-dollar social media company wants a profitable business rather than a cash-burning operation.
Luckily, Twitter does deliver on that front. In the first quarter, it generated $103 million in adjusted net income, which translates to $0.15 in adjusted earnings per share (EPS), smashing Wall Street’s expectations of $0.10 per share. Note that in the past four quarters, Twitter has beaten analysts’ EPS estimates by double-digits every single time. (Source: “Analyst Estimates,” Yahoo! Finance, last accessed June 13, 2016.)
The Bottom Line on TWTR Stock
If you’ve been paying attention to the Internet industry today, you’d know that companies are fighting for user growth. The more users they have, the better they will be at adopting all kinds of monetizing strategies.
However, user acquisition costs have been going up. With the industry already crowded, it would take more than just money to build a social media platform from scratch.
Twitter has already built something that would be a nice addition to an existing tech giant. Moreover, as Twitter stock plunged over the past several months, its valuation has come down. I would not be surprised if the company is on the shopping list of some big players in Silicon Valley.