Twitter (NYSE: TWTR) is exploring a merger with TikTok in yet another attempt to survive and stay relevant.
ByteDance and Twitter have held talks about transferring TikTok’s American, Australian, Canadian, and New Zealand operations to Twitter Inc, The Wall Street Journal claims. To elaborate, ByteDance is the Chinese company that owns TikTok.
Moreover, they could build TikTok into Twitter or Twitter into TikTok in North America, TechCrunch claims. Thus, TikTok could get access to Twitter’s social network and Twitter could access to TikTok’s social network.
Twitter and TikTok’s desperate bid for survival
I think both Twitter Inc. (NYSE: TWTR) and TikTok are in a desperate race for survival.
In particular, TikTok is trying to stop President Donald J. Trump’s (R-Florida) threat to ban the app on 15 September 2020 if it finds an American owner. Meanwhile, I think Twitter is trying to survive coronavirus and a looming revenue collapse.
To explain, Twitter’s revenue growth fell by -18.77% in the quarter ending on 30 June 2020, Stockrow estimates. In detail, Twitter’s quarterly revenues fell from $1.007.34 billion on 31 December 2020 to $807.64 million on 31 March 2020 to $683.44 million on 30 June 2020.
Twitter Loses Money
The coronavirus pandemic is costing Twitter for money. For example, Twitter reported a quarterly operating loss of -$7.44 million on 31 March 2020 that fell to -$273.93 million on 30 June 2020. Twitter started 2020 with a an operating income of $152.88 million on 31 December 2020.
Dramatically, Twitter’s quarterly common net income fell from $118.77 million on 31 December 2019 to -$8.40 million on 31 March 2020 to -$1.78 billion on 30 June 2020. Moreover, Twitter’s quarterly gross profit fell from $693.33 million on New Year’s Eve 2019 to $523.60 million on 31 March 2020 to $395.40 million on 30 June 2020.
Predictably, Twitter is generating less cash. Twitter’s quarterly operating cash flow fell from $277.18 million on 31 December 2019 to $246.17 million on 31 March 2020 to $201.02 million on 30 June 2020.
Notably, Twitter’s quarterly ending cash flow fell from $3.493 billion on 31 March 2020 to -$356.67 million on 30 June 2020. Twitter began 2020 with a -$69.78 million negative ending cash flow on 31 December 2019.
Is Twitter Running on Debt?
I think Twitter (TWTR) loses money and runs on debt. To explain Twitter reported a financing cash flow of $693.18 million on 31 December 2019.
That quarterly financing cash flow grew to $963.98 million on 31 March 2020. The quarterly financing cash flow fell to $25.10 million on 30 June 2020. To elaborate, the financing cash flow records the cash a company generates from borrowing or finance.
However, Twitter is accumulating cash. For instance, Twitter had $7.766 billion in cash and short-term investments on 30 June 2020. That cash and short-term investments grew from $7.670.66 billion on 31 March 2020 and $6.649 billion on 31 December 2019.
Thus, Twitter has borrowed enormous amounts of money. Yet its capacity for debt repayment is falling with Twitter’s revenues. Twitter had $4.890 billion in total liabilities and $3.988 billion in long-term debt on 30 June 2020.
Twitter needs more Revenue Fast
I think Twitter CEO Jack Dorsey wants TikTok because he recognizes Twitter needs more revenue fast.
One way to get that revenue is to grow Twitter’s social network. Buying TikTok’s US assets could add 165 million American members to Twitter’s ecosystem. To explain, Oberlo estimates there were 165 million TikTok users in the United States in July 2020.
TikTok has incredible popularity. Oberlo claims TikTok was the most downloaded app in the iOS App Store in 1st Quarter 2019. Overall, Sensor Tower Intelligence estimates users downloaded the TikTok app over two billion times by 2nd Quarter 2020.
In contrast to Twitter, TikTok’s usage surged the pandemic. The number of TikTok downloads surged from 190.4 million 1st Quarter 2019 to 315 million in 1st Quarter 2020.
Can Twitter Make Money from TikTok?
Moreover, lifetime user spending on TikTok grew from $175 million at 1.5 million in 2nd Quarter 2019 to $456.7 million in 2nd Quarter 2020. Thus, TikTok makes money and its revenues are growing.
Twitter had 330 million active users worldwide in 1st Quarter 2019, Statista estimates. Statista estimates there were 62.55 million Twitter users in the United States and 49.1 million Twitter users in Japan in July 2020.
In contrast, Wallaroommedia estimates TikTok had 800 million active monthly users in July 2020. Wallaroom claims TikTok had around 80 million active monthly users in the United States in August 2020. Hence, Twitter could add 80 million active monthly users by buying TikTok’s American operations.
Can Twitter Afford TikTok?
Twitter (NYSE: TWTR) cannot afford to buy TikTok’s assets. For instance, Twitter had total assets of $12.548 billion on 30 June 2020. Moreover, Mr. Market gave Twitter a share price of $37.90 and a market capitalization of $29.737 billion on 14 August 2020.
However, ByteDance could sell the US TikTok assets to Twitter to maintain control. The other big bid for TikTok’s US assets comes from Microsoft (NASDAQ: MSFT). If Microsoft buys TikTok USA, I think ByteDance will lose control.
On the other hand, investors estimate ByteDance was worth $50 billion in July 2020, Reuters reports. Hence, ByteDance could sell TikTok America to Twitter and maintain control. For example, ByteDance could finance Twitter’s purchase of US TikTok.
Thus, ByteDance could end up with more power, revenue, and influence by combining two popular American social networks; Twitter and TikTok. Thus, President Trump could give a Chinese company more influence over America’s social media.
Could Disney buy TikTok?
However, there are other American companies that could buy TikTok. Disney (NYSE: DIS) or Netflix (NASDAQ: NFLX) could use TikTok to distribute video content, for example. I think Disney could want TikTok because TikTok is a video content app and Disney’s principal business is video content.
Notably Disney is buying video distribution platforms, including Hulu. To explain, Disney bought 21st Fox partially to acquire 75% of Hulu.
However, I do not think Disney will share control of TikTok with ByteDance. Twitter, on the other hand, will share control of TikTok, which is why a Twitter/ByteDance deal is tempting.
Is Twitter a Good Stock?
I do not think Twitter (TWTR) is a good stock because its social media footprint is too small to compete with behemoths such as Facebook (NASDAQ: FB).
Statista estimates Twitter had just 326 million users in July 2020. In contrast, Statista estimates Facebook had 2.603 billion users, WhatsApp had two billion users, Facebook Messenger had 1.3 billion users, and Instragram had 1.082 billion users. Thus, I estimate Facebook’s four social media products had 6.445 billion users in July 2020.
However, joining with TikTok could help Twitter get big fast. To explain, Statista estimates TikTok had 800 million users in July 2020. I estimate a combined TikTok/Twitter could have 1.126 billion users.
Consequently, I think Mr. Market overvalued Twitter with a $37.94 share price on 18 August 2020. Personally, I don’t think Twitter is worth $10 without TikTok. However, I think Mr. Market could pay $150 to $200 for TikTok/Twitter shares.
However, a TikTok acquisition could give Twitter the resources it needs to grow big enough to survive.
Therefore, I think Twitter + TikTok could be a good investment. On the other hand, I will advise investors to wait TikTok/Twitter becomes a reality to buy Twitter. Until then I think Twitter has little value and no growth potential without TikTok.
Originally published at https://marketmadhouse.com on August 18, 2020.