Is Twitter Next on Microsoft’s Shopping List?

LinkedIn (NYSE: LNKD) might have been just the first name on Microsoft’s (NYSE: MSFT) shopping list. Twitter (NYSE: TWTR) could be the software giant’s next acquisition target.

Twitter is a potential Microsoft because it has a great deal in common with LinkedIn. Like LinkedIn, Twitter is an ailing publicly-traded social media company with a fair number of users that is losing a lot of money.

Microsoft Missed the Boat on Social Media

LinkedIn had around 100 million users and Twitter had around 320 million users in April, Statista reported. Purchasing both LinkedIn and Twitter would give Microsoft 720 million users, because its existing solution Skype had 300 million users.

Those numbers are hardly that great because the largest social media network; Facebook (NASDAQ: FB), had 1.59 billion users. The second largest network WhatApp; also owned by Facebook, had 1 billion users.

 

The third largest network was Facebook Messenger which had around 900 million users in April according to Statista. If these numbers are correct Facebook might have as many as 3.49 billion users in its three largest social networks.

If another Facebook-owned social network; Instagram, is added to the mix that number could be as high as 3.89 billion. Instagram had around 400 million users in April according to Statista.

From these numbers it is clear that Microsoft has missed the boat in social media and is now playing catch up. Buying LinkedIn will give Microsoft 420 million social media users; which is still less than Yahoo!’s (NASDAQ: YHOO) Tumblr which had an estimated 555 million users.  Microsoft would have to purchase Twitter; as well as LinkedIn, to get more users than Tumblr.

Twitter is a Bargain Compared to LinkedIn

Such a purchase might make sense because Twitter is actually cheaper than LinkedIn. The messaging service had an enterprise value of $8.6808 billion; and a market capitalization of $11.21 billion on June 15, ycharts reported. One the same day LinkedIn had a market cap of $25.55 billion; and an enterprise value of $23.57 billion.

Microsoft can certainly afford to purchase both companies for cash. The software giant had $105.55 billion in cash and short term investments on March 31, 2016. What’s more interesting is that the purchases would not much of a dent in Microsoft’s bank account.

LinkedIn cost Microsoft $26.2 billion in cash – about the same price as its market cap. Therefore Twitter would presumably cost around $11.21 billion. Both social networks would cost Microsoft $37.41 billion.

After that purchase Microsoft would still have $68.14 billion in the bank. It would not take that much risk, but would gain a nice tax break. There is a public relations angle here too; because Microsoft would also reduce the amount of cash it has parked offshore, in an attempt to avoid US taxes. Some observers have been criticizing the amount of cash American corporations have been holding outside the country in recent years.

Purchasing Twitter would give Microsoft access to 320 million social media users, some tax breaks and a little help in the public relations department. It would also tell Mr. Market that Microsoft is finally getting serious about social media. The software giant would also keep Twitter, out of Alphabet’s (NASDAQ: GOOG) hands.

Twitter could be a Bargain

Just like LinkedIn, Twitter is a very unprofitable company that is losing a lot of money. Its financial numbers actually look a lot like LinkedIn’s.

The highlights of Twitter’s first quarter earnings report include: a negative net income of -$438.32 million, a negative profit margin of -13.41% and a negative earnings per share ratio of -0.6622. Despite that, Twitter has some interesting attributes that might make it profitable someday.

Twitter reported making $453.65 million in cash from operations and holding $3.576 billion cash and short-term investments on March 31, 2016. That gives Twitter, a lot of float making a potential value investment for Microsoft. Twitter is actually generating some cash.

The messenger has also experienced dramatic revenue growth in the past year. Twitter reported a TTM revenue of $1.588 billion in March 2015 that grew to $2.377 billion in March 2016. Donald Trump’s favorite social media would be a sensible purchase for either Microsoft or Alphabet (NASDAQ: GOOGL), from a financial standpoint.

Would Twitter have been a Better Buy than LinkedIn for Microsoft?

The obvious question arises would Twitter have been a better acquisition for Microsoft than LinkedIn? Twitter would have certainly been cheaper and it has more users, but is it a better company?

Interestingly, LinkedIn’s financial numbers are very similar to those at Twitter. It reported the following numbers for first quarter 2016:

• $3.214 billion in revenues.

 

• A negative diluted earnings per share ratio of -1.306

 

• A negative net income of -$169.42 million.

• A profit margin of -5.32%

 

• A free cash flow of $34.28 million.

 

• $894.03 in cash from operations.

 

• $3.16 billion in cash and short-term investments.

As you can see some of Twitter’s numbers; such as its free cash flow, were actually better than LinkedIn. Yet the balance sheet is clear, both companies are losing a lot of money even as their revenue keeps growing.

LinkedIn’s revenue growth is similar to that at Twitter, LinkedIn added $831 million in revenue between March 2015 and March 2016. Revenues at Linked rose from $2.383 billion in March 2015 to $3.214 billion in March 2016. Twitter’s revenues grew by $789 million during the same period; rising from $1.588 billion in 2015 to $2.377 billion a year later.

The numbers show us that Twitter would have been a better purchase for Microsoft, but both companies are good organizations that would add value. Microsoft and its shareholders will be well served by the LinkedIn deal, and they would also profit from a Twitter acquisition.

Microsoft is still a Great Investment

There is one clear lesson from the financial numbers; Microsoft is still a far better investment than either Twitter or LinkedIn. The software giant was trading at $49.94 a share on June 15, 2016, yet it rewarded investors with a 2.78% dividend yield and a return on equity of 12.75% for the first quarter of 2015.

More importantly Microsoft still has a lot of float; in addition to the cash and short term investments it reported some great numbers on March 31 including:

• $86.89 billion in revenues.

 

• A net income of $10.18 billion

 

• A diluted earnings per share ration of 1.264.

• A profit margin of 18.29%

 

• A free cash flow of $8.361 billion.

 

• $181.87 billion in assets.

 

• $31.12 billion in cash from operations.

 

The obvious conclusion is that Microsoft is still a great value investment, especially for those who love companies with a lot of cash. The company is an even better investment because it is in a position to make strategic acquisitions like LinkedIn.

Twitter is an obvious acquisition target that will be purchased by Microsoft, Alphabet, Alibaba (NYSE: BABA) or Facebook in the near future. The company’s social media profile and low price is simply too tempting an acquisition for a big boy to pass up.

Twitter’s days as an independent company are probably numbered. The LinkedIn deal makes it probable that a number of smaller social media brands including; Tumblr, Telegram and Snapchat are Microsoft or Alphabet acquisition targets. Microsoft and Google might have missed the ball on social media, but they will soon get back in the game the old-fashioned way – by buying up market share.