Google Buys Parts of Twitter, But Doesn't Want the Whole Thing

By Leo Sun Markets Fool.com

Alphabet's (NASDAQ: GOOG) (NASDAQ: GOOGL) Google recently acquired mostof Twitter's (NYSE: TWTR) developer products for an undisclosed price. That package includes its mobile application development platform Fabric, the Crashlytics crash-reporting platform, mobile app analytics tool Answers, SMS login system Digits, and development automation system Fastlane.

Continue Reading Below

Image source: Getty Images.

Does the sale indicate that Twitter will sell itself off in bits and pieces instead of as a whole company? Or does it mean that Twitter is merely streamlining its business by dumping its non-core assets? Let's take a closer look at Twitter and Google's plans to decide.

Why did Twitter sell its developer products?

Shares of Twitter currently trade well below its IPO price of $26 due to its stalled out user growth, sluggish revenue growth, and lack of GAAP profitability. Its monthly active users (MAUs) rose just 3% annually to 317 million lastquarter as its revenue grew 8% to $616 million -- marking its slowest growth rate since its IPO. Its GAAP net loss only slightly narrowed from $131.7 million a year ago to $102.9 million, mainly due to high stock-based compensation expenses which gobbled up 26% of its revenues.

Faced with these challenges, Twitter announced plans to slash 9% of itsworkforce and wind down non-core businesses like Vine and Fabric, while focusing more on its core "Bluebird" Twitter app. Itshuttered Vine last year, but Fabric reportedly attracted the attention of several bidders, including Microsoftand Google. Twitter CEO Jack Dorsey claimed that the cuts could drive the company "toward GAAP profitability in 2017."

Continue Reading Below

By abandoning its developer tools, Twitter can no longer establish an app ecosystem tethered to its social network and back end services. But the retreat isn't surprising, since Facebook abandoned itscomparable back end as a service (BaaS) platform, Parse, last year. That failure was attributed to the fact that Parse couldn't compete against similar app development platforms from Google, Microsoft, and Amazon's AWS. If Facebook couldn't compete, it's doubtful that Twitter could have fared much better. Investors should also have seen the writing on the wall when Twitter canceled its annual Flight developer conference last year.

Why did Google buy Twitter's tools?

Google might seem like an 800-pound gorilla in internet-related services, but its cloud infrastructure platform -- which provides development tools, analytics, and computing power for developers and companies -- is much smaller than Amazon's AWS and Microsoft's Azure. BaaS platforms play a key role in that battle, since they provide cloud-based apps with computing power while letting developers manage those apps, view usage data, and add push notifications and other features.

To compete more effectively against Amazon and Microsoft, Google acquired Firebase, a BaaS start-up, in 2014. Firebase's developer base quadrupled since that acquisition to about 450,000 users by mid-2016, and Google added additional analytics capabilities and mobile development tools. Google plans to integrate Fabric directly intoFirebase, while the other tools should be gradually integrated into the platform.

Google's decision to buy Twitter's development tools instead of the whole company also indicates that the social network still isn't desirable as a single purchase. That's likely because potential suitors can't figure out how to address Twitter's slowing MAU and revenue growth and weak profitability. They also probably don't want to inherit Twitter's ongoing problems with bullies, trolls, illicit posts, and fake accounts.

Is the data licensing business next to go?

Twitter's eagerness to sell its non-core businesses raises interesting questions about its Data Licensing business, which sells "firehose" feeds of data to various companies. Its revenue rose 26% annually to $71 million, making it Twitter's fastest growing business unit.

But it's alsobeen blamed for spreading fake news and causing stock market "flash crashes" by rapidly sending bot-generated tweets to news organizations and high-speed trading firms. I previously speculated that Twitter was unwilling to purge its network of bots because they counted as MAUs and they fed the licensing unit's firehose feeds. If Twitter sells or spins off its data licensing business, it would generate some fresh cash and let it purge some bots and fake accounts to improve the quality of its social network.

The bottom line

Twitter's sale of its developer tools to Google isn't a game changer for either company. But it reveals how aggressively Twitter is streamlining its business around its Bluebird app, and indicates that Google might need more acquisitions to keep up with Amazon and Microsoft in the cloud platform race. Therefore, investors should see if Twitter unloads any more non-core businesses in the near future.

10 stocks we like better than Twitter
When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*

David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now and Twitter wasn't one of them! That's right -- they think these 10 stocks are even better buys.

Click here to learn about these picks!

*Stock Advisor returns as of January 4, 2017

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Teresa Kersten is an employee of LinkedIn and is a member of The Motley Fool's Board of Directors. LinkedIn is owned by Microsoft. Leo Sun owns shares of Amazon.com. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Amazon.com, Facebook, and Twitter. The Motley Fool has a disclosure policy.