Aaron Durand (@everydaydude) for Twitter.
Twitter (NYSE: TWTR) is in an incredibly strange place for a tech company right now. It has 313 million monthly active users, making it one of the most powerful social networks in the world. When you're looking for breaking news, Twitter is the place to go. It provides a peek into the lives and thoughts of the rich and famous, and it's one of the biggest live video platforms as well.
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Yet Twitter has struggled to turn its strengths into success on the stock market. In the second quarter, revenue was up just 20% year over year to $602 million, and down from a Q4 2015 peak of $710 million. And the company lost $107 million in the quarter.
One of the biggest problems is that Twitter can't monetize its vast audience. Ad engagements were up 226% year over year last quarter, but the cost per ad engagement dropped 64%. That's not a winning formula, so Twitter may have to look at alternatives such finding an acquirer who could pull profits out of its business model.
Twitter may be more valuable elsewhere
It's undeniable that Twitter has valuable content. As a breaking news source alone, it's an incredible resource to the media and advertisers. Twitter often knows what's happening in the world and what people are talking about before news or trends hit the airways or search engines. So, there's value there if someone can unlock it.
Alphabet (NASDAQ: GOOG) has long been talked of as a potential acquirer of Twitter. They have a partnership to bring advertising to Google, and Tweets even appear in Google search results. But if Alphabet bought Twitter, it could use all of the company's data to make its search engine, advertising, news, analytics, and other services even better. Alphabet would be able to unlock Twitter's value beyond its potential as an advertising venue, because it has the infrastructure of a large, profitable tech company. This would be analogous to the company getting into Gmail or Android. It isn't the product itself that adds value; it's the way the product's data adds strength to the entire business that's valuable.
Microsoft (NASDAQ: MSFT) is another company that could use Twitter's network to add value to its business broadly. If you think about the acquisition of LinkedIn (NYSE: LNKD) and how it's pushing the news platform in its social network, the tie makes sense. Skype, MSN, Bing, and Xbox could all use Twitter's network and video functionality to reach more consumers and generate revenue for Microsoft.
These are just two examples of companies that might mine value from Twitter, but the point is that Twitter as a business is probably worth more under another company's umbrella than it is as an independent company. And this isn't a unique problem to Twitter.
We've seen this acquisition model before
I don't think Twitter's conundrum is any different from other media acquisitions over the past decade or so. Pixar, Marvel, and Lucasfilm were valuable companies on their own, selling movie tickets, toys, and DVDs. But they're far more valuable under Disney's banner. Disney can not only leverage its balance sheet to help these studios make more films, it owns broadcast networks and theme parks that keep a studio's assets generating value for years, if not decades, to come.
Comcast's acquisition of NBC Universal and Dreamworks is the same model. Studios are best when married with distribution and theme parks and as stand-alone businesses have a hard time unlocking the same kind of value.
Twitter is like Dreamworks, Marvel, or Lucasfilm, sitting on a treasure of assets without the ability to monetize them effectively. Google, Microsoft, or another tech giant could help unlock that value. But Twitter doesn't seem to be able to do that on its own.
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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Travis Hoium has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Alphabet (C shares), Twitter, and Walt Disney. The Motley Fool owns shares of LinkedIn and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.