Loop Capital Downgrades Twitter To Sell, Meaningful Premium Unlikely

"We believe the company may eventually get a takeover bid but that a meaningful premium from its current price is unlikely, which leaves more downside risk if a deal falls through," analyst Blake Harper wrote in a note.

Twitter's board is reportedly seeking a valuation of $30 billion, or about $43 per share, which in Harper's view would stretch the balance sheets of most (but not all) suitors.

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In addition, a buyout of Twitter is challenging given the potential acquirer needs to invest substantially to fix the following issues:

1. "Product upgrades are needed to make it easier for wider audience use."
2. "User growth is stagnant in the U.S."
3. "Advertising technology upgrades are needed amid an increasingly competitive environment."
4. "Safety and abuse issues persist."
5. "Further potential dilution from employee stock based compensation."
6. "A ballooning price tag and valuation that makes an ROI difficult to achieve."

Despite facing user growth headwinds, Twitter's live streaming is the best tool to monetize a larger audience and show its potential to suitors. That said, the analyst is skeptical whether the live streaming has made a significant impact in the third quarter.

"We do not believe the live streaming events changed MAU trends in Q3, with only two NFL events in the quarter, and an uncertain link between viewership and logged in usage," Harper continued.

Shares of Twitter closed Tuesday's trading at $23.72, which implies 18.3x EV/EBITDA and 44.3x P/E on 2017 estimates growing 16 percent and 9 percent.

"We view the stock as having a sizable takeover premium priced in given Internet peers are trading at 15.4x and29.4x, respectively, and LinkedIn is being acquired at 18.1x and 42.0x on its 2017 estimates," Harper highlighted.

As such, the analyst said it is unlikely for Twitter to fetch a premium price. However, Harper maintained his price target of $18.

At time of writing in Wednesday's pre-market session, Twitter was down 1.18 percent at $23.44.

Full ratings data available on Benzinga Pro.