The following commentary was originally sent to Action Alerts PLUS subscribers on Feb. 1, 2016, at 11:37 a.m. ET.
In what seems like it has become something of a regular thing, shares of Twitter (TWTR) are experiencing yet another big move in today's trading session (this time to the upside). Shares are up roughly 10% (at this writing) following a report from The Information detailing a previously discussed deal with venture capital firm Andreessen Horowitz and private equity firm Silver Lake Partners in which the two companies would work together to buy out the struggling micro-blogging site. (Twitter is part of the Action Alerts PLUS portfolio.)
Although there is no evidence that talks remain on the table, shares are still ripping as the market seems to find the possibility of a deal more likely with each subsequent rumor (click here to read our commentary on the most recent speculation). In this particular case, the news appears more credible in light of the stock's meteoric decline (down over 70% from its peak and 30% from the IPO price), Andreessen's established presence on Twitter, and prior collaborations between Andreessen and Silver Lake.
Despite the thoroughly discussed issues at Twitter (mainly the company's struggle to grow its user base and generate engagement), the media platform still boasts a massive user base (more than 300 million), is expected to post revenue growth of over 50% to roughly $3 billion this year, is in the early stages of integrating what many consider a high-growth asset (Periscope) and remains the go-to platform for live news updates. For these reasons, we are not surprised by the presence of potential takeover interest and continued chatter.
That said, we believe it is important not get sucked into the speculation in the absence of a tangible offer or active, substantiated deal conversation(s). While we have long touted the company's unlocked potential, and agree that many outside parties likely see the same possibilities, the fact remains that the user engagement issues continue to highlight results. Recent turnover and management shakeups (click here to read our recent piece) only add to the murky situation that a buyer would have to inherit, address and ultimately fix, all of which would require substantial time and resources.
We will be watching next week's earnings announcement (Feb. 10) for any spark in underlying trends (user and advertising metrics, in particular) but are hardly holding our breath. Twitter is not only our smallest position but has been our sole Three-rated name for over eight months. It is beyond a show-me story, and we have no reason to be optimistic around any near-term turnaround in core trends.