Persistent rumors of a Twitter Inc (NYSE:TWTR) buyout have been driving the service’s share price in recent months. Twitter shares have advanced 9.18% in the last 4 weeks while spiking 32.91% in the past three months. Over the past 5 trading sessions the stock has gained 8.11%. With more than 100 million active users, Twitter is one of the most widely used social media platforms in the world. But why aren’t buyers lining up to place a bid on the micro-messaging service? The massively popular social media platform is too overpriced for its own good.
According to a Forbes report, Twitter is overvalued by any metric and that with every spike in its share price from buyout speculations, it becomes “less likely to be acquired.”
Adding to the acquisition rumors, Twitter co-founder Evan Williams revealed that the company is open for a sale if an offer appears. The interview caused Twitter’s stock to jump by 7%, just as it did in early August when there was a rumor that Saudi billionaire Prince Al Waleed bin Talal and former Microsoft CEO Steve Ballmer might make a run at buying larger stakes in the popular social media channel.
Meanwhile, a Recode report noted that the company is considering the possibility of a sale at a board meeting set this week. This too pushed Twitter’s stock up.
Now here comes the problem: with the stock’s recent surge Twitter’s current market value is $13.2 billion. This means bids would have to be at least $15 billion, an unreasonable amount even for the likes of Google.
The news source noted that Twitter’s stock has climbed to the $19 – $20 level, making the company’s estimated value at about $15 billion or “$20 billion with a takeover premium included.” Now the question becomes, is Twitter worth that much to a strategic buyer?
Well, for starters, despite the fact the social media firm has been able to effectively generate sales from sponsored tweets and partnerships, the company seems unable to turn a profit. Twitter lost more than $100 million last quarter and $500 million last year. Its total accumulated deficit as of 31 Dec. 2015 was $2.1 billion. Furthermore, the social network’s troubles do not end there. The company’s equity-based compensation requires the it hands out $167 million of its revenue to employees, which is more than twice than what Facebook (NASDAQ:FB) gives to its employees.
Assuming that Alphabet Inc. (GOOGL) is interested in a buyout to boost its own social media platform, handing out almost $200 million to employees is a lot of money, even for a company valued between $15 billion to $20 billion.
Of course, such acquisitions are not uncommon. Twitter investors are hoping that the company will secure a deal similar to what LinkedIn Corporation (LNKD) got. Microsoft Corporation (MSFT) acquired LinkedIn for $26 billion. But analysts dashed hopes of a similar deal, pointing out that LinkedIn’s business is better than Twitter’s.
LinkedIn’s gross profit margin is at 86%, much higher than Twitter’s 67%. In addition, LinkedIn’s user data is more valuable than Twitter’s. And unlike Twitter’s user data, LinkedIn’s user data is something that acquirer Microsoft (and even Google) needs. All these factors boosted LinkedIn’s premium price, which is 8x its revenue.
Twitter is lucky if it could get 50% of what LinkedIn got out of the deal. Until the company’s stock price falls to a more realistic level, Twitter’s value gap makes a takeover highly unlikely at this point.