The market can be stupid sometimes.
For instance, let's take the deal of Verizon (VZ) for aging web property Yahoo (YHOO) . The marriage was seen as the likeliest from the start -- Verizon had an open checkbook and Yahoo had an activist investor breathing down its neck. Moreover, AOL's CEO, Tim Armstrong, has likely dreamt about fixing Yahoo, just as he did for AOL.
Tech execs are constantly in search of the next challenge, and Armstrong's success with AOL likely has resonated with the top brass at Verizon. When all is said and done, Verizon will have probably made a good deal to buy Yahoo as it gives them another lucrative place to sell ads, generate news and, over time, drive content to subscribers.
But a funny thing has happened during the bidding war for Yahoo: Shares of Twitter (TWTR) have surged some 29% from their May 3 intraday low. The market has taken up the notion that Twitter could be the next buyout candidate in young tech.
It certainly fits the Yahoo mould, in many respects. Leadership at Twitter is in bad need of a top-to-bottom overhaul. It needs more experienced leaders, like Tim Armstrong, than young entrepreneurs, such as current CEO Jack Dorsey, who is also trying to run digital-payments company Square. There needs to be grownups in the room, in other words.
The company has lost key talent since the IPO, and may be having trouble attracting new creative talent in light of its lagging stock price. If a college kid out of a top school has two offers on his or her plate -- Facebook (FB) or Twitter -- it's likely Facebook all day. And there is this general sense on Wall Street that the company is flailing around with a strategic plan that may or may not lead to making money in x number of years.
The market may be playing a dangerous game in wagering that a Twitter will be scooped up by an Apple (AAPL) , Facebook -- or even a Verizon. It's not a Yahoo, far from it.
If you are among the newly formed class of Twitter bulls, here are a couple of reasons to head for the hills now that the Verizon/Yahoo deal looks signed.
Yahoo has proven it can make money from its business model, actually quite a bit of money. Sure, the amount of money has been on the decline thanks to changes in the ad industry and competition in search from Google, but just delivering a profit is important. Twitter has not shown that it can generate profit at all, and there is zero line of sight as to when it may make money. So you don't even know if Twitter has a viable model. Right now, it's a giant high-school experiment that happens to be a publicly traded company. In fancy terms, Twitter doesn't have proof of concept.
Along those lines, Twitter hasn't shown that its newest ventures could make money within the next five or 10 years. Take a look at Periscope. First of all, the user interface is horrible. But in terms of a business model, how on earth does Twitter think it can place ads on a platform such as Periscope? If a 15-year-old kid on Twitter has to wait 30 seconds for an ad to play before shooting a Periscope of an event in their life, it's going to turn them off. What will they do instead? Take a regular video using their iPhone and then upload it to Facebook. That is even if the 15-year-old is on Twitter instead of the way more-popular Snapchat. Twitter is pouring money into ventures that may have no chance of being viable. Why would a deep-pocketed investor pay a premium to gain exposure to that?
And speaking of the core business of Twitter -- a 24/7 newsfeed -- there are valid concerns about the long-term outlook. The company has not proven that it can turn into an ad behemoth just because President Trump goes on a midnight tweet storm about Iran.
Twitter is not evolving into Facebook. And you have to question Twitter's user numbers -- are they truly engaged each day? If not, does Twitter have some magical new tool hitting soon to get them Facebook-like hooked?