Why Twitter Could Be an M&A Target

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Shares of Twitter Inc. (NYSE: TWTR) traded up about 5% Wednesday afternoon following comments by company co-founder Evan Williams, currently CEO at Medium, that seemed to encourage the idea that Twitter might be for sale. In an interview Wednesday morning on Bloomberg TV, Williams said that Twitter is in a “strong position,” but board members “have to consider the right options.”

A couple of those options are either a merger or an acquisition. Since reaching a peak share price of $69 late in 2013 the stock has lost around 72% of its value to trade at around $19. Earlier this year the stock dipped to an all-time low of under $14 a share.

The company has posted positive earnings for the past several quarters and analysts are expecting earnings per share of $0.09 in the current quarter. Twitter’s problem has been growth. The social media firm’s user base simply is not growing at the rate investors and analysts think it should. EBITDA was up 45% year over year in the second quarter and revenues were up 20%.

Twitter’s monthly user base is forecast to grow to nearly 290 million by the end of this year by research firm eMarketer. That represents year-over-year growth of nearly 11% on top of 2015 growth of 9.8%. On its website, Twitter claims 313 million active users of which 82% are active mobile users.

But competition is getting stronger and Twitter’s latest move to shore up its business is to give video content creators 70% of the revenue their videos generate. By paying more than either Facebook or Google, Twitter hopes to attract more videos. The company is willing to take a smaller cut of the ad revenues in exchange for more revenues.

But will it attract more users? Unless it does, not only will Twitter lose total revenues, but growing its monthly active user count will also be harder. That’s why a merger or an acquisition (plus Twitter’s $3 billion in cash and short-term investments) may be on the table now.

Twitter shares traded up about 5.3% Wednesday afternoon at $19.35 in a 52-week range of $13.73 to $31.87. The consensus 12-month price target on the stock is $16.79.