Rumors broke last week that Twitter (TWTR) might be going up for sale -- and the company saw a 20% bump on the news.
In this episode of Industry Focus: Tech, Motley Fool analysts Dylan Lewis and David Kretzmann explain what we know about the deal and how shareholders of all the companies possibly involved should feel about it. Listen in to hear why Twitter might be considering selling itself, why half of shareholders are thrilled by the news and the other half less than pleased, what Google (GOOGL 1.68%) (GOOG 1.75%) might have to gain from buying Twitter, and why salesforce.com's (CRM 2.82%) apparent interest has us scratching our heads.
A full transcript follows the video.
This podcast was recorded on Sept. 23, 2016.
Dylan Lewis: Welcome to Industry Focus, the podcast that dives into a different sector of the stock market every day. It's Friday, September 23rd, and we're talking Twitter buyout rumors. I'm your host, Dylan Lewis, and I'm joined in the studio by Motley Fool Premium analyst David Kretzmann. David, how's it going?
David Kretzmann: I'm glad to be here. Thanks for having me, Dylan!
Lewis: It's nice to have you back. Originally, the show we had planned was...a few weeks ago, we did this show on when to sell a stock, and we talked about recently public company Twilio. We mentioned it, but I think it warrants a deep dive. We were going to do this follow up, we're geared up for it, we had the notes ready this morning. I came down to your desk to talk about it a little bit. And the news fairy came by and dropped off a little nugget for us.
Kretzmann: Sometimes that happens.
Lewis: Yeah. Listeners, I'm guessing that you saw, but I happened to be over in the editorial pod when someone asked me, "Hey, did you see the news with Twitter?" I see a headline from CNBC, "Twitter May Soon Get Formal Bid, Suitors Said to Be Including Salesforce and Google." Shares are up around 20% today. Seems like we should talk about this.
Kretzmann: I think we can postpone Twilio. Twitter, it's a close enough name to Twilio, I think we can get away with it for this week.
Lewis: Some people might not even notice.
Kretzmann: Probably not. They're just like, "Oh, they're talking about TWI companies today, one of those tech companies."
Lewis: So, today's tech show, we're going to talk about some of the speculation around Twitter, how shareholders might be feeling about it, and why one of the rumoured acquirers has us scratching our heads a little bit.
A couple of details that I've seen so far -- according to sources, the company has received some interest from several tech firms. According to CNBC, potential suitors include Google or Salesforce. I've seen from TechCrunch that Verizon and Microsoft (MSFT 2.58%) might also be in the mix. Twitter's board of directors is said to be very interested in reaching a deal. No sale is imminent, but they seem to be on board. No assurance of a deal at all, but from reports that I've seen, we could see selling by the end of 2016. From what I understand, a lot of the interested companies seem to be drawn in by a lot of the data that Twitter is generating, more so than their standing as a media company, which is kind of interesting.
Shares are up 20% today. David, let's talk about this a little bit. From the perspective of Twitter shareholders, how are you feeling about this?
Kretzmann: I don't know. I'm a Twitter shareholder, they're definitely disenfranchised over the past couple years. As a lot of people are, Twitter has been a disappointing performer. It's still priced below where it was when it went public. This is a company that's had a lot of struggles. Sales have been decelerating at Twitter since the second quarter of 2014. So, for about two years now, every quarter, sales have decelerated. The most recent quarter, sales were up 20%. For the upcoming quarter, they're guiding for sales growth between 3.5%-7%, even with co-founder Jack Dorsey returning as CEO last October, Twitter is having a hard time figuring out its vision and grasping a market in a profitable way. The company is still struggling to generate a profit. You have sales decelerating, and such extravagant stock-based compensation, as we've talked about in previous episode. It's kind of the perfect storm of trends going against Twitter right now as a business.
The company has been trying to reinvigorate growth primarily by focusing on live streaming video on its platform. Last week, we had the first live stream of an NFL game.
Lewis: Did you check that out?
Kretzmann: I didn't, did you?
Lewis: Yeah, it was actually pretty cool. It was a nice little interface. I've seen from some people that it was easier to navigate that than some of their own cable packages, which is a testament to how well they've streamlined that for the user experience.
Kretzmann: Yeah, I've heard good things about it. They're basically releasing a Twitter live streaming video app on different platforms. Even if you're not a Twitter user with an account, you can still watch these events live. They did some live stuff with the Olympics as well. They're planning to live stream the presidential and vice presidential debates here in the U.S. coming up. But, even that first launch of the NFL game last week, on average, there were 243,000 viewers watching the game on Twitter. That compares to 15.4 million who watched on CBS or the NFL Network. So, that's a good start, but it's not really clear if that's going to spur growth quickly, at the rate that Twitter needs.
Lewis: Because those people are watching for free, they don't need a cable package; they don't need a TV. It's very easy for them to just tune in and watch the game if it's something they want to do.
Kretzmann: Yeah. That's certainly to be expected. Online video is really still the wild west right now. A lot of companies are trying to figure this out. You have Facebook (META 2.96%) really ramping up their live video efforts, YouTube is doing a lot in that space. Twitter is trying to grab a piece of that. So, there's a lot of competition. The boundaries are still being defined in the market.
Twitter obviously has a powerful platform. Its user base has pretty much stalled out at about 315 million monthly active users. Still a powerful platform, but from a business perspective, the company has really had a hard time getting a whole lot of grasp. So I think the fact that the board at Twitter is interested in acquisition at this point, when [its] stock price is relatively depressed, and even below the IPO price. The fact that the board is interested in selling the company around these levels makes me wonder if they're not totally optimistic about Twitter as an independent company going forward.
Lewis: Yeah, and I think, for shareholders, you kind of have two different groups. You have people that maybe got in shortly after the IPO, or about a year ago, something like that, and bought in when it was a much more highly valued company. And then you have people that bought in maybe in the last four months at much lower levels, and were hoping for that turnaround story, or saw that they were relatively cheap compared to where they've been in the past, and maybe they'd be a buyout candidate. I think those two groups feel very differently about this proposal.
We saw a 20% spike today. There's probably some more upside there if an actual deal comes in. I'm guessing there would be a premium on top of that. But, I know Jason Moser, for example, wasn't particularly psyched about this deal, because in his mind, they're just starting to figure out their focus, looking at livestream and being more of a media company. A lot of the decisions and moves they've made have centered around that idea, and he wanted to see them have a little bit more runway, and see how it materializes in the coming quarters, and have the public opinion wait until then.
Kretzmann: To give some perspective, the market cap today, after this 20% run-up, is about $16 billion. LinkedIn was recently acquired by Microsoft, assuming everything goes through, for a little over $26 billion. I don't know if Twitter would go for a higher price tag than LinkedIn. But either way, potentially, you could see Twitter sell for maybe up to $30 billion. I would be concerned if a company paid more than that. I would think they would be overpaying. But that gives some context for what we're looking at right now.
Lewis: Yeah. Meanwhile, I think a lot of people that bought recently are pretty psyched to see a nice 20% pop.
Kretzmann: It's great for them, yeah.
Lewis: In some ways, it's a proof that there's something here. We just don't know what to do with it. They have a user base, and they have some platform, but there's value that other companies are recognizing in that. Which is validating to a certain extent, but if your cost basis is well above where they currently are, you might only enjoy that so much.
Kretzmann: Not a rosy scenario.
Lewis: Exactly. I think a couple of important things to keep in mind, here -- there's no deal yet. We don't have any details on a deal. No terms, nothing like that to speculate on. Like I said, this 20% spike -- it's kind of an arbitrary bump. That's the market reacting to positive news, and the idea that there could be a buyout. What that actual buyout might look like remains to be seen. Like you said, the premium would probably be much higher than that. But, don't anchor to that, and don't think that 20% is gained value at this moment, necessarily. They still need to prove that out.
Looking at some of the rumored acquirers, on my end, it's not really shocking to see Google's name thrown into the mix, here. You see, pretty much anytime there's been rumors about Twitter being acquired, Google has gotten lumped in there. They integrate tweets in the search results, so, clearly, they see some value in what the platform provides in terms of live content. Google has over $12 billion in cash at their disposal. They have $77 billion if you include their short-term investments. That's a lot to work with.
Kretzmann: They're doing OK. They've produced about $20 billion in free cash flow over the past year. Google has no shortage of cash. From Alphabet's perspective, I think Twitter could be attractive, because they still have a sizable platform of relatively engaged users. Online advertising, obviously, is Google's bread and butter. They might be able to transfer some of their learnings and expertise to Twitter and fine-tune the strategy there. If Twitter's move into live video streaming grabs hold, that could really compliment what Google is doing with YouTube and competing against Facebook Live for this emerging market of online video. There are a fair amount of parallels where it could make sense for Google.
At the same time, I still worry that, just because Google has that mountain of cash, you don't want to overpay for an acquisition, as we've seen with Microsoft's reign under Steve Ballmer. Just because you have a lot of cash and spend it acquiring a lot of companies doesn't mean it's going to work out well for shareholders. You want to be sure that just because Google or some of these other companies have a lot of cash, it's still very important that they're getting a good value for the cash that they spend on acquisitions.
Lewis: And just looking at what they've done as a company in the last year or so, particularly since Ruth Porat has hopped on, of the share repurchases, is one of the other ways they can use that cash. You have gone through almost all of that authorization now. So, it'll be interesting to see what happens with that. But that's another use for that cash that, as a shareholder, I wouldn't necessarily mind.
So, Google we see as kind of making sense, here. Flipping it over to one that I'm a little bit more skeptical of, Salesforce [laughs]. Following the rumors, and the early reports from CNBC, Salesforce's chief digital evangelist tweeted this out: "Why Twitter? 1, personal learning network. 2, the best real-time content-rich news. 3, democratize intelligence. 4, a great place to promote others."
Kretzmann: That sounds like an acquisition thesis right there.
Lewis: Yeah, it does. If there are rumors about your company being interested in another company, and then you publicly tweet about how great that company is, that's like the equivalent of someone in grade school thinking you have a crush on someone, and then liking all their pictures on Facebook. You know?
Kretzmann: It's damning evidence.
Lewis: It's like, we clearly know that you're interested. I know he backed off a little bit later in the day. I think he said these were just his personal beliefs, they're a company that he's liked for a very long time. But, there's a lot of legitimacy, it appears, to Salesforce being in the mix.
Kretzmann: Yeah. And it's a little bit surprising to me as well, because Salesforce also was trying to outbid Microsoft's bid for LinkedIn. So, Salesforce was willing to pay more than $26 billion for LinkedIn.
Lewis: And that $26 billion was a number that a lot of people took a double-take at. That was a hefty premium that Microsoft paid for LinkedIn.
Kretzmann: Yeah, and Salesforce is about a $50 billion company. They have about $1.1 billion in cash, $2.5 billion in debt. So, they have a net debt position on the balance sheet of $1.3 billion. They are not flushed with cash to make a $25 billion to $30 billion acquisition in the case of LinkedIn or Twitter. So, I wonder, are they just trying to grow for the sake of growing? This is a company that's still doing very well in the space of cloud services for the enterprise. They're still growing organically, in a lot of cases, well above 25% every quarter. So, it makes me wonder where management's head is at, here, what their strategy is, because if they're just trying to make a big acquisition for reasons, to me, that seem a little bit arbitrary, it's hard for me to see a direct connection between Salesforce and Twitter, how they would integrate it into their services to the point where you could justify such a massive acquisition. So, I don't know, it makes me definitely do a double-take on Salesforce and how confident I am in that business as an investment.
Lewis: Yeah. You look at them over the last six quarters, top-line growth of 20% each quarter. Going back to Q1 of 2015, 23% year-over-year growth. Most recent quarter, they're at 25% year-over-year growth. That growth is not decelerating. If anything, it's bumped up a little bit. And, they've just seemed to flip on that switch of consistent profitability. It is interesting. And, last year, they upped 2017 full-year guidance. So, they have a business that's kind of humming along. Everything seems to be going well for them. I saw a quote, I believe it was from Marc Benioff, CEO. He told Recode, "It's the season of M&A." Like, he is very caught up in this idea of making an acquisition, it seems. With LinkedIn, I think it made little bit more sense. They were interested in some of the recruiting-side products.
Kretzmann: More of the enterprise stuff that ties right into what Salesforce is doing, yeah.
Lewis: With Twitter, it's tougher to see. It's just kind of a head-scratcher.
Kretzmann: It is. It also puzzles me, because Marc Benioff, the founder and chairman and CEO of Salesforce, he has been very public and upfront in saying that his goal is for Salesforce to be the first cloud company to hit $10 billion in annual revenue. Right now, they're at about $7.5 billion. They have a lot of deferred revenue on their balance sheet that's piling up. So, this isn't a company that's lacking for growth opportunities right now. So, it makes me wonder, do you really want to justify your financial position to acquire a LinkedIn or a Twitter? They're certainly powerful platforms, but from a business perspective, both LinkedIn and Twitter were kind of struggling to generate consistent profitability. I think there were some questions about the future vision in both of those cases. So, Salesforce to me doesn't seem like a company that would really benefit from taking on a Twitter or a LinkedIn, something that's just a little too far outside their core competency, I think. So I don't know. Like I said, the fact that they're so interested in making such a huge acquisition for reasons that they haven't really spelled out very effectively, in my mind, makes me wonder if management might be reaching a little bit to grow. So, that's something to watch, but I'm definitely a little bit more cautious with Salesforce after all these talks about Twitter and LinkedIn.
Lewis: Yeah, it does seem like it has the possibility for it to be a little bit more of a distraction than an add. You hear these horror stories about these companies making big, splashy acquisitions, and then having to write down a ton of the value of that acquisition, whether it'd be a year later, two years later, something like that. I'd hate to see a company setting itself up for that. Maybe they'll come out and say, "This is exactly what we have planned," and we'll all have that ah-hah moment. But, right now, it seems like it's a head-scratcher.
Kretzmann: Yeah, I think management needs to be very clear explaining to shareholders what they see with Twitter -- if they are serious about going after it. And it wouldn't be surprising if they are, since they were so serious about going after LinkedIn. They have to really spell out what they see, what the strategy is, how they're not going to lose money doing this and hurt shareholders in the process.
They have had a partnership with Twitter since 2012. Salesforce basically has all these different cloud products. One of them is Analytics Cloud. Since 2012, they've taken the social media data from Twitter and fed it into their Analytics system, their cloud service, and that basically gives Salesforce's customers insight into how their customers are talking about their products and brands. So, there is a tie-in there. I don't know if that's enough to justify taking on Twitter, especially when Twitter is having enough problems on their own as an independent company. I just don't know if Salesforce has the resources and the focus to bring on a company that's struggling on its own that would probably be about half the size that Salesforce is today, and manage its organic growth effectively while turning around Twitter. That's where I have some questions about where they see the value in this for shareholders.
Lewis: Yeah. So, I think the TL;DR, the short of it, for people who might not be up on tech speak, Salesforce shareholders, possibly time to get a little bit skeptical and keep an eye on what the company is doing. I think, Twitter shareholders, this is obviously something that's super-relevant to you guys. I think a lot of people probably want to see this play out and let the business run for another couple quarters. It remains to be seen if that will happen. But you can be sure that we're going to continue to follow this story, and we'll update you guys with what the team is thinking, and generally how to feel about it as it develops.
Kretzmann: Yeah. I think if you're a Twitter shareholder, you at least want to see how this bigger move into live-streaming video pans out before the company sells itself. To me, I would be frustrated as a Twitter shareholder if they do sell the company by the end of the year, before seeing how this stuff pans out with the NFL, the presidential debates, as the company is making this stronger push into live-streaming video. You have to remember, these new platforms won't immediately be as profitable as traditional TV or cable TV. It'll take time for the viewers for online video to reach the level we see with cable TV or traditional TV. But it will happen eventually. And once that happens, then the platform will become more profitable. But we're still just at such an early stage with online video. And I think Twitter is banking on online video, to an extent, to turn the company around and refocus the company. So, if I'm a shareholder, I at least want to see how that pans out before selling the company. That's how I'm looking at it right now. We'll see how it plays out.
Lewis: Yeah. As more details come up, I'll be sure to have you back on the show to talk about it, David.
Kretzmann: I'm looking forward to it.
Lewis: Well, listeners, that does it for this episode of Industry Focus. If you have any questions, or you just want to reach out and say hey, you can shoot us an email at industryfocus@fool.com, or you can always tweet us @MFIndustryFocus. If you're looking for more of our stuff, you can subscribe on iTunes, or check out The Fool's family shows at fool.com/podcasts. As always, people on the program may own companies discussed on the show, and The Motley Fool may have formal recommendations for or against stocks mentioned, so don't buy or sell anything based solely on what you hear. For David Kretzmann, I'm Dylan Lewis. Thanks for listening, and Fool on!
