Is Twitter an acquisition target?

The past few months haven’t exactly been easy for Twitter’s CEO Jack Dorsey. Ever since he took back the reigns at the company he co-founded in 2006, he has had to let more than 300 employees go, see several top executives leave and witness his company’s stock price crumble to new lows.

Since the day Dorsey was named permanent CEO of the social media company in October 2015, Twitter’s stock price dropped by 40%, shaving more than $6.5 bln off the company’s valuation. Twitter’s market cap currently stands at $11.5 bln, down from almost $40 bln at its peak in December 2013.

Twitter’s low valuation has made the company a subject of acquisition rumours. After News Corporation had dismissed takeover rumours earlier this year, another rumour surrounding Twitter’s possible acquisition by a group of investors surrounding venture capitalist Marc Andreessen surfaced on Monday. Twitter’s stock price was up almost 10% in early trading, stabilising to a 8% gain by afternoon at $18.12 as Wall Street appears to like the idea of Silicon Valley investor Andreessen and his and firm Silver Lake Partners getting involved.

According to The Information, several investors in Silicon Valley are pulling together plans to buy or restructure the company. Talk of a potential acquisition follows upheaval in its management ranks, with several executives including the heads of product and engineering leaving Twitter, Dorsey confirmed last month.

USA Today reported that the company is also expected to unveil new board members when it reports quarterly earnings next week. Once again, the big question for investors is how quickly is Twitter adding monthly active users. Last quarter, Twitter missed Wall Street forcecasts with 307 mln monthly active users.

Looking back, a glitch involving one of the underwriters of Facebook’s embarrassing initial public offering (IPO) back in May 2012 and the near immediate fall below IPO price, even Mark Cuban said he got burned on his investment and had to sell at a loss one month after buying the IPO.

Then reality set in, and three and a half years later shares are pushing $112 and a $360 bln valuation, nearly 200% higher since the infamous IPO flub, according to 24/7 Wall St.com. Those who have stayed away from Facebook these past three years plus can vent, and those who were squeezed out at the lows along with Cuban can only weep now. The important question however is what can we learn from an investment perspective from the case of Facebook? Will such a rise also happen with Twitter Inc?

One could argue that Twitter’s current flops are similar to what Facebook already experienced in 2012 and 2013, when major ad campaigns were pulled at the last minute, embarrassing the company. Only weeks before the Facebook IPO, General Motors cancelled a $10 mln ad campaign over ads not being flashy enough. That also contributed to the IPO flub. One year later, in May 2013, both Nissan and Nationwide pulled ad campaigns because their ads were showing alongside offensive posts.

May 2013 was the last time Facebook shares were available in the $25 range. So perhaps the same is in store for Twitter? It doesn’t seem so, according to 24/7 Wall St.com. While Facebook’s mistakes early on were rookie faux pas that was correctable, Twitter’s mistakes since its own IPO are more fundamental to the nature of the company itself. GM’s infamous cancellation on the eve of the Facebook IPO was arguably GM’s own mistake. Facebook stuck to its ad format and didn’t change it just to suit GM. As for the Nissan and Nationwide fiasco one year later, Facebook has since figured out how to protect its advertisers from being juxtaposed to offensive content.

As for Twitter, its decline is not an issue of some glitch or flub or embarrassing incident with its advertisers. Its biggest problem is that its per user value is so much lower than Facebook’s and does not seem to be climbing much. Twitter has 320 mln monthly active users as of its last filing. Divide that by last quarter’s revenue and you get $1.78 per user. Keep in mind that these numbers already attempt to filter out spam accounts.

Granted, Facebook’s user base is much bigger, but the real issue is that its average revenue per user is nearly $12, almost seven times Twitter’s. The reason is that Facebook connects tight social circles of people who tend to stay on the site longer to talk (or yell) at each other. This allows for better targeting and increases the chances that ads will be clicked on and effective. Twitter users on the other hand are not necessarily socially connected to one another, so the site functions more like micro news with users flipping in and out quickly. This damages per-user revenue and is less conducive to targeted advertisements.

Even back in 2012 when Facebook was floundering, its average revenue per user was $5.32, still three times higher than what Twitter’s is now. That number more than anything is the biggest reason Twitter now does not look like Facebook in 2013.