Investors love Twitter again - but their excitement could scare off any potential buyers
- Investors bid up shares of Twitter on Thursday after the company posted better-than-expected fourth-quarter results.
- The stock's surge came despite the fact that it had already risen 40% in the last year, and despite Twitter posting an actual sales decline for the year.
- For many investors, the best hope is that Twitter will be acquired, but the stock's jump could make the company less attractive to potential suitors.
For Twitter, all of the recent good news may end up having some unintended negative consequences.
The social networking company on Thursday announced much-better-than-expected fourth quarter results. The report was cheered by investors, who sent the company's stock up as much as 30% in intraday trading, before it settled back down to being up around 15%.
But Wall Street's enthusiasm could rebound on the company longer term. One of investors' best long-term hopes for Twitter is that it will eventually be acquired. After a 40% run-up in its stock over the last year, it was already looking pricey. The stock's latest jump is likely to give potential acquirers even more reason to shy away.
Brian Weiser, a financial analyst who covers Twitter for Pivotal Research Group, cut his rating on Twitter from a "hold" to a "sell" Thursday, pointing to the stock's surge.
"The stock's reaction to these results were out of proportion in our view," Weiser said in a research note. He continued: "While we think that there is value in Twitter as an acquisition target - and a pathway to a resumption of growth de-risks Twitter to potential buyers - we don't think any transaction is likely to occur any time soon, if ever."
Twitter results were better-than-expected - but that doesn't make them great
Twitter's results were impressive, at least if you grade on a curve. It beat Wall Street's expectations on both the top and bottom line. Its revenues increased for the first time in four quarters and it posted its first-ever profit.
But the bar for Twitter was set fairly low. While investors were surely happy to see that its revenue didn't shrink again, it only grew by 2% from the same quarter a year earlier and its sales in the US - its biggest market - actually fell 8%.
And the company's gains seem to be coming from getting more of its users to come back to its service more often, rather than by substantially increasing its total number of users, said James Cakmak, a financial analyst with Monness, Crespi, Hardt, in a research note. The number of daily active users of Twitter increased 12% from the fourth quarter a year earlier, while its number of monthly active users (MAUs) rose just 4% from the same period.
Compared with the third quarter, Twitter's overall number of MAUs were flat. And in the United States, the number actually declined by more than 1%.
Pointing to such numbers, Cakmak questioned whether Twitter's rebound is sustainable and reiterated his neutral rating on the company's shares.
"It's not every day we see this much enthusiasm for a tech company becoming a high flyer by managing not to shrink, but here we are," he said in his note.
There are plenty of reasons for potential suitors not to buy Twitter
Twitter faces multiple challenges. Facebook and Google are gobbling up nearly all of the growth in online advertising. Facebook has more than six times the number of users Twitter has and has continued to grow at a much faster clip. Not only does Twitter look like a niche site by comparison - it's struggled, unlike its bigger rivals, to figure out how to make itself appealing to advertisers.
At least in the eyes of some investors and analysts, the company's best hope is that another company will recognize its underlying value and snap it up. Its 330 million users doesn't put it in Facebook's league, but that total is nothing to sniff at. It also has an internationally recognized brand and user base.
Just not at its current share price.
On an adjusted basis - which excludes stock-based compensation and other charges - Twitter would have earned 44 cents a share last year. At its current stock price, that gives it a price-to-earning ratio of more than 70. That's a pretty steep valuation for a company whose sales actually slipped for the full year last year and whose adjusted earnings grew by around 19%.
It's particularly pricey for a company that still hasn't completely figured out its business model. And one that has all sorts of other questions and potential risks hanging over it, such as how it will replace Anthony Noto, its outgoing chief operating officer, and the danger of potential regulation to address the use of its service to spread propaganda.
"There's not enough here to get constructive," said Cakmak, explaining his decision to reiterate his rating on Twitter's shares.
The danger for Twitter investors is that potential acquirers will feel the same way.